Much has been made of the huge rise in commodity prices in the past few years, with prices of gold, silver and other precious metals dominating the business headlines, and many people cashing in through the proliferation of “We Buy Gold!” shops seemingly sprouting overnight throughout the country. But there has been another “gold rush” occurring in our midst, one that is just starting to get the attention of people outside of the industry.
According to a recent report by the Federal Reserve Bank of Kansas City, U.S. Midwest farmland rose over 25% in value, and some states exceeded single year price increases of 40%. This was the highest price rise in farmland in the U.S. in the survey history, and some reports pegged individual sales of Midwest farms at $20,000 per acre. For California’s own massive farm region of the San Joaquin Valley, booming exports of almonds, walnuts and other commodities has driven this land significantly higher as well, while at the same time, regulatory and water limitations have only served to make existing land and farms even more valuable. In the past ten years, California coastal lands in Santa Barbara, Santa Maria, Paso Robles and other areas have seen explosive price growth as a major wine industry has emerged, turning former idyllic ranch and grazing lands long overlooked by most into the “new Napa.” (There are now well over 200 operating wineries in the Paso Robles/Templeton/San Luis Obispo region.)
For those of us in the coastal regions, such prices would hardly catch our eye, and seem like a bargain. Imagine your own twenty acre spread in San Diego for a mere $200,000? (Can anyone say ‘Green Acres?) But for those in agricultural production (farmers), lending (bankers), services and supplies (tractor and track sales), etc., this is an alarming state of events. In any region, the escalation of farmland prices is always a very mixed blessing for the local farmer, for while it does indeed give them a bump in their “paper wealth” it typically makes it more difficult to obtain financing and operating loans and can distort the long term view of farming through enhanced competition from speculators and outside investors. How does an agricultural banker provide long term stable funding to farmers when speculators push the price upwards for the underlying asset being collateralized?
Over the past month or so, I have seen several investor newsletters that counsel their clients to consider purchasing farmland as an alternative investment, providing a tangible asset for the savvy investor in turbulent times in the global markets. As an opposing view, I would counsel caution for such investments. There are so many variables in the proper valuation of farmland, with the essential need for local knowledge often missing as to a particular parcel’s actual viability and suitability for production in these investor solicitations. In any particular area, even adjoining parcels can have very different values for reasons only accessible to a careful and experienced eye.
In my own business and investment experience, I think that farming is best left to farmers. If the bug hits you in 2012 to acquire some real estate, I would look first to opportunities closer to home, perhaps an undervalued and distressed residential or commercial property where information, knowledge and variables are better understood.