How to cash in on the land bubble

Agricultural land prices are soaring. And while they may no longer be cheap, they could still have a way to run yet. Merryn Somerset Webb explains the best ways for you to cash in - and warns of some investments to avoid.

We spend a lot of time at MoneyWeek looking out for bubbles. Over the last decade it's been a pretty rewarding task.

The problem of course lies not in seeing a bubble, but in figuring out when a boom turns into a bubble, and then figuring out when that bubble will burst.

Both tend to take longer than you might think (I give you the boom in defensive income-producing stocks, and the bubble in government bonds, as evidence from today's markets).

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With this in mind, we are looking again at agricultural land...

Land prices are soaring

We started suggesting that you buy land and buy equities exposed to farming and to land seven or eight years ago. That's gone well.

The real price of agricultural land barely budged from the 1950s through to the mid-1990s. Then it started moving.

This was no doubt partly a response to the beginning of a boom in commodity prices over all. But as a report just out from Bedlam Asset Management argues, it was also down to "an acceleration in the use of government debt financing".

However, even by 2005, land still looked relatively cheap. Since 1900, says Bedlam, the ratio of land yields to equity yields has been around half with land considered a lower risk asset than equities. In 2005, land was yielding only a little less than equities.

It doesn't look cheap any more: prices have risen so much since then, that by the end of 2010, overall land yields looked derisory'. Think 1.8% in the US, 1.5% in France and 1.8% in Scotland.

Those are the kinds of numbers that all too often mark the shift from boom to bubble. However, bubble or not, it is still rising regardless: prices accelerated further in 2011 and are still on the up.

In the UK, Welsh farmland prices have now doubled in the last five years and average prices have doubled in three years (Savills). No other investment I can think of has performed so well.

But the boom could continue

So what next? There is a tiny bit of caution creeping in. In the UK, the Danish (who were huge buyers) have become net sellers. Most farmland consultancies are now predicting lower rises of something in the region of 5% this year.

But it isn't clear that this bubble has anywhere near run its course. Why?

First, because it just isn't possible to call the end of the global shift of the monied into real assets. Empty your head of all the distractions of the global financial markets, and the only certainty we really have is that over time inflation is a given.

Keeping real interest rates negative (ie keeping the base rate below inflation), along with various other titbits of financial repression (outlawing cash transactions worth more than €2,500 as Spain has done for example) is the only way to make the global sovereign and personal debt crises go away.

Or at least, it is a lot better than the alternatives hyperinflation, depression or a round of official sovereign defaults. So the money printing while it will come with stops and starts - will continue and the rush to real assets will too.

Secondly, there is plenty of scope for food prices to rise, taking land yields higher as they do. We all think food prices are very high. But in real terms they are not.

Bedlam notes that during the last 30 years of the last century for example, "real wheat prices tumbled from over $30 a bushel to $5" as productivity soared and transportation costs fell.

What might turn that around? The story we all know well: reductions in the supply of fertile land as a result of desertification and urban development, and a rise in the demand for grain-guzzling cows for the world's rising population of wannabe carnivores.

We should also remember that quantitative easing and cheap money aren't the only ways in which our governments distort the price of farmland. They have more long-standing methods too: tax reliefs (no inheritance tax in the UK) and the subsidy system.

The Common Agricultural Policy still takes up around half of the EU budget despite endless rows about how it should be reformed. And it makes buying farmland in parts of Europe something of a no-brainer for farmers.

Here's a nice example from Bedlam. You can buy a hectare of land in Germany for $12,600. Borrow the money at 5% (it is very easy to borrow on land because it is one of the few assets still rising in price) and your annual interest is $630. You then get an area payment of $420 on the land, leaving you with a mere $210 to pay.

"Buying a farm has never been so cheap in terms of the annual cash cost." And that's before you even begin to think about the money you can make from the likes of wind and solar power. Put up a 500kw wind turbine on your land in the UK before October and you'll be basking of revenues of around £300,000 year on an investment of £1.3m in no time at all.

The biggest risk with land investment

There are risks to all this of course. Bubbles always end it is just never really certain what will bring them down. It could be the sudden return of hard money. It could be the collapse of Europe, leading to a collapse of the subsidy system. Or it could just be a longer-term jump in agricultural productivity.

However, the biggest risk is probably the route ordinary people (those of us who can't afford to buy real farms) take to invest. Bedlam suggests the same stocks we've been suggesting on and off for years as a proxy for land prices (Deere, Yara, Syngenta and so on), and we are mostly still fine with those over the medium term. You can also find some tips on the related topic of investing in water in the latest issue of MoneyWeek magazine, out now. (If you're not already a subscriber, you can read it now by signing up for a subscribe to MoneyWeek magazine).

What we aren't fine with and what you need to ensure you don't go too close to, are the organisations popping up here and there offering you access to farmland in Argentina or unspecified parts of Africa, with projected returns of 150%-plus in the next five years, plus "guaranteed money back". Go for one of those and you'll be taking on a lot more than just the risk of a collapsing bubble.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.