Terraqua - Land Investment

The Land Investor

News and Commentary on Land-based Investment

Farmland Valuations – A Bubble Down on the Farm?

Old McHedgefund has bought some farms.  Why wall street’s sudden interest in farmland?  Investors who’ve never even considered purchasing a farm, at the mercy of depressed markets and the global contraction, have been buying into the favorable price trends of Midwest U.S. farmland.  This week the topic of farmland values elevated to lead story status in the Wall Street Journal with the article, “A Bubble Down on the Farm?”

What is a bubble for one investor may not be a bubble for others.  It probably depends upon whether the investor is in it for the long haul.  While hedge fund managers may be buying into an entire sector, other farm investors are looking to the success of a distinct farm or ranching operation.

For the hedge fund investor a 40% drop in farmland values would represent a disastrous “popping of the bubble” and be viewed of as “a loss” possibly triggering the sale of the land into weakness, in favor of alternate new profit ventures.  This is the nature of the hedge fund beast.

For others, whose interest is more driven from the continual stewardship, improvement and year after year operation and return from the farm, the 40% drop in value of a farm purchased for $8 million which derives a net income of $400,000,  views his/her operation as successful.  These are the owners who tend to sell into strength.   It is interesting to know that the bulk of today’s farmland buyers are farmers, but participation by non-farm players is increasing.

So as to the question, ”Is there a bubble down on the farm?”.   My answer is “Yes, the marginal deals struck by nonfarm players at ridiculous multiples of expected income are at bubble’s edge……But this is an inefficient market, and there are many deals that are being made today at well justified values, even at today’s prices, that can provide a stable return of 4-5% independent of appreciation.”  You just have to know how and where to properly source these investments plus oversee and assist in aptly handle the lease the land.  Lease arrangements are frequently three years in duration, and in addition to deriving rents from farmers, arrangements can include the participation of owners in the sale of what is grown.

Terraqua LLC can help investors source direct leased and managed farmland investments as well as separately in Minnesota, Wisconsin, Iowa, Nebraska, Kansas, South Dakota and Kansas as well as separately managed farmland accounts.  To discuss, contact John Watson.  303-900-4226   watsonj@terraqua.us

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