October 16, 2011

Unintended consequences - hedge funds and farming

Now this will be nasty when the bubble bursts -- from Crain's Business Magazine:
As hedge fund buys the farms, prices rise � but what happens come the downturn?
When Roger Betz is not helping other farmers in his job as a Michigan State University Extension farm management educator for Southwest Michigan, he tends a few acres of his own in Eaton County near Lansing. Every year, he buys just a little more land, getting ready for when he retires from his day job and spends all his time doing what he loves.

But Betz sees a threat on the horizon to small farmers such as himself: competition from hedge-fund-owned farms that could drive him out of business. Land speculation tends to increase the price of not only the land but also the food it produces.

And when that upward trend reverses itself, Betz fears, deep-pocketed investors can better weather the storm than can small, family-owned Michigan farmers.

According to the annual Michigan Land Value survey conducted in the spring of 2010 by the department of agricultural, food, and resource economics at Michigan State University, farmland values increased 1.4 percent from spring 2009. The Federal Reserve Bank of Chicago puts the increase at about 10 percent from Oct.1, 2009 to Oct.1, 2010.

Both sources expect the 2011 numbers to reflect further increases.
Nice little boom market there -- first some backstory:
Perry Vieth, president of Granger, Ind.-based Ceres Partners, is one of the investors feared by Betz and many of the farmers Betz meets every day. Ceres owns 63 farms in Illinois, Indiana and Michigan. About a dozen are in the Great Lakes State, primarily in the southwest Michigan counties of St. Joseph, Cass and Van Buren.
And the concern:
So, fueled by friends, family and a few high-net-worth individuals, Ceres Partners has spent the past five years going on a farmland shopping spree. Right now, Vieth said, Ceres has about $70 million in assets and has a pipeline of an additional $50 million worth of farmland that the investment firm looks to acquire.

Most of the time, Vieth said, Ceres buys land that is already being farmed, but also occasionally from estates or trusts � land that otherwise would sit unused. Ceres buys the land and leases it to the farmer, who continues to work the land. Only now they can do it more efficiently if they don�t own all that real estate.

Vieth compares it to when IBM Corp. sold off a lot of its real estate about a dozen years ago, allowing the technology company to concentrate all its capital on its core business.

�They can get a higher return on their equity by using the capital they do have in production and equipment,� Vieth said. Rather than spend $2 million to buy the land, the farmer can buy $2 million worth of seed or fertilizer.
cough--bullshit--cough That $2M is amortized out over 15-30 years while the $2M of seed is an absurd number. Nowhere is the farmers rent talked about. What are the real numbers if Ceres is making such a good profit for their investors. Some more:
The way that farmer Betz sees it, though, that�s part of the problem. He admits that land is a good, solid long-term investment. Land in general does not suffer from the same kinds of ups and downs that other investments have seen.

But that is not true of food prices � which, while on an upward trend, also tend to be more volatile. Michigan farmers fear that speculation fuels even more volatility in food prices.

Right now, prices are rising and investors speculatively buy more shares, which raises food prices even more. But Betz is convinced that what comes up, must come down. Farmers with long memories recall the early �80s, when rising land values suddenly crashed, leaving many farmers in the red. Michigan�s farm economy did not recover until 1987.

Conditions are different now, with high commodity prices keeping pace with high land values. If a sudden dip recurs, deep-pocketed investors can weather the downturn. But it would ruin small-farm owners, who have about 70 percent of their savings wrapped up in their land and capital costs.

And that especially would be bad news for farmers in Michigan, a state dominated by small farms owned by private individuals.
And at the end of the day, the small farmer and the food consumer will be the worst hurt by the speculative "investments". Say hello to higher food prices... Posted by DaveH at October 16, 2011 12:31 PM
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