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As Home Prices Rebound, Farmland Gets Riskier: Kleintop
At a time when the housing market is showing double-digit price increases for April, fears are high that the strongest segment of the economy will hit a turbulent patch once the impact of higher borrowing costs begins to filter through the numbers sometime this August. And according to Jeff Kleintop , chief market strategist at LPL Financial, forget about condos in Phoenix, farmland in the corn-belt is where the new risk lies. “Ten years ago you could buy an acre of Iowa farmland from around $1,000,” Kleintop says in the attached video. “Last year, that went for $8,000,” he says, pointing out that some recent sales fetched as much as $15,000 per acre. While he’s the first to acknowledge that farmland is in no way comparable to the size and scope of the housing crisis, he says there’s more going on than just rising rates. “It has to do with Emerging Market demand for more food,” he says. “Very, very low interest rates have allowed these prices to soar.” Add in a wet planting season and the fact that grain prices have actually moved lower over the past year, and Kleintop says “farmers are in the position where finances are a little bit tight.” In as much as mortgage lenders Fannie Mae and Freddie Mac are dependent upon steady employment, he says the U.S. Farm Credit System is dependent upon a good harvest. Kleintop adds, “If we see these rates continue to rise a little bit in an environment where farmers simply don’t have the income to make payments, you could see a minor financial problem develop, particularly amongst Midwestern lenders with ties to farmland.” For now, he says it is something that investors should “keep a close eye on” and be on the lookout for any signs of stress in the financial system, such as increases in overnight lending rates. As for those individual investors who were fortunate enough to ride the wave of rising farm prices over the past five, 10 or even 20 years, Kleintop says, “they may also see some losses after years of gains.” Continue reading
Four Reasons Farmland May Be the Investment of the Decade
By Igor Zhitnitsky and Victor German NEW YORK ( TheStreet ) — Over the last several years, U.S. farmland prices have seen astounding gains, outperforming most other asset classes by a lot and leading some to speculate that farmland is the latest in a series of asset bubbles set to burst. But while the run-up in agricultural land is cooling off for the moment and the market may be ripe for a temporary pullback, the overall trend is fundamentally positive. Here are four reasons the long-term outlook for U.S. agricultural land is strong: Foreign demand for meat: The rapidly expanding middle class of the developing world has a growing appetite for meat. While China has been able to meet its own demand, its grain production capacity is inadequate to feed its livestock, which cannot be sustained on grazing alone. Per-acre grain productivity is much lower in China than in the West, and so the country has turned to the U.S. and other large producers for feed grains. This foreign appetite has led to a sharp increase in demand for corn and soybean-producing land in the U.S., and that pressure will only increase as the Chinese and other developing world consumers continue to increase their meat consumption. That points to the increasing importance of agricultural land. Historically low grain supplies: The 2012 drought showed that supplies of corn and other grains are unusually low. Average stocks-to-use ratios — an industry standard for measuring the amount of supply cushion available to the market — is historically low and has been trending down over the decade. That indicates that growth in demand is generally outpacing supply, and price shocks like last year’s will likely become more commonplace. Historically low debt levels: During the 1980s, when farmland did go boom and then bust, the market saw high levels of debt. Farmers racked up loans and rushed to buy out their neighbors’ properties before prices went any higher, leading to a crash in land values when grain prices faltered. In this decade, however, farmers’ debt levels are very low and stable. In addition, agricultural lending institutions and Farmer Mac ( AGM _ ) have heeded lessons learned from the 2008 credit crisis and kept lending practices on the conservative side. Technologically driven productivity gains: The per-acre production of U.S. farmland has grown consistently and rapidly for decades, outpacing both the productivity of agricultural sectors in other countries, as well as other industries in the U.S. In this decade, many high-tech productivity drivers are emerging, ranging from the use of GPS for precision farming to the bioengineering of more efficient grain strains. The trend hasn’t gone unnoticed by the elites of the investment community – Ray Dalio’s Bridgewater Associates holds a sizable position in Monsanto ( MON _ )and Warren Buffett’s Berkshire Hathaway ( BRKA ) made a long-term bet on Deere & Co. ( DE _ ) So how can a sophisticated investor benefit from this macro trend? Investing in established companies that dominate the industry is one route, the one taken by some high-profile names. A more ambitious investor willing to take on more risk might also do well by picking winners from among smaller more volatile agricultural ventures springing up in the sector. Companies based outside the U.S., like Adecoagro ( AGRO _ ) and Cresud ( CRESY _ ) are examples, but one should weigh carefully the potential instability and political risks that loom over the agricultural sectors of developing countries. The best way to benefit from rising land prices is the obvious one — to own a geographically diversified portfolio of land. There are unmatched advantages to directly owning farmland, including high reliable yields and tax advantages that other asset classes lack. Owning land, however, is very involved. It comes with complexity many smaller investors don’t think they can navigate on their own — CSR ratings, proximity to transportation and irrigation, working with land managers, protecting land from erosion, commodity hedging, complying with a multitude of state laws affecting absentee landlords and liquidity issues. But for those motivated to finding opportunities in the Corn Belt, a gold rush for fertile land may be the investment frontier of the decade. At the time of publication the author held no positions in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet’s regular news coverage. Continue reading
Carbon Market Glut-Fix Plan Wins Backing in EU Parliament
By Ewa Krukowska – Jul 3, 2013 European Parliament approved a plan intended to reduce a record glut of permits and increase prices in the world’s biggest carbon market after they slumped to an all-time low. European Union carbon allowances rose the most in two months after lawmakers in Strasbourg, France , endorsed a revised version of a plan known as backloading advanced by the European Commission, the region’s regulatory arm. That was the parliament’s second verdict on the measure, which would delay the sale of some permits to support prices after it blocked the plan in April, triggering a 45 percent slump in permits. Enlarge image European Union carbon allowances rose as much as 9.8 percent after lawmakers in Strasbourg, France today endorsed a watered-down version of a plan known as backloading and advanced by the European Commission. Photographer: Fred Tanneau/AFP via Getty Images “It’s a good signal that parliament voted this through today,” Oeystein Loeseth, chief executive officer of Vattenfall AB, Europe’s biggest emitter after RWE AG (RWE) , said by telephone. “When you take volumes out of the market, prices will increase.” Emissions prices in the $72 billion cap-and-trade program have lost more than 70 percent in the past four years. The euro area’s record-long recession reduced demand for pollution rights and worsened a glut that swelled to about 2 billion tons in 2012, according to the EU. That’s almost equal to the region’s annual limit imposed on 12,000 power plants and factories. The caps were set before the financial crisis. EU allowances for delivery in December gained as much as 12 percent, the biggest jump since May 3, to 4.79 euros a metric ton on the ICE Futures Europe exchange and were at 4.76 euros at 2 p.m. in London . The contract slumped to a record 2.46 euros on April 17, the day after the parliament blocked the emergency fix in its first plenary vote. ‘Largest Hurdle’ Lawmakers endorsed the plan 344 to 311, with 46 abstentions, according to the voting result. “The backloading plan has passed its largest hurdle so far, but auction curbs are still far from certain and unlikely to start before mid-2014,” Itamar Orlandi, an analyst at Bloomberg New Energy Finance in London said today by e-mail. “The focus will now shift from Strasbourg to Berlin, as Germany ’s decision on the plan will determine whether it can go ahead.” Traders will now focus on positions of national governments, whose consent is also needed to enact the plan, according to Ingo Ramming, co-head of commodity solutions at Commerzbank AG in London. “Markets are hoping on a fast-track decision to regain confidence in the EU emissions trading scheme,” he said today by e-mail. “We would expect that prices are capped in the mid-term around 6 euros on the back of uncertainties on the European economy, supply from industrials and auctioning.” Rejected Amendments Permits may rise to 5.20 euros after the approval, according to the median forecast of nine analysts and traders surveyed by Bloomberg News before the vote. The assembly rejected amendments seeking an earlier return of the delayed permits to the market and earmarking 600 million allowances for a special fund to promote low-emissions technology. It backed a proposal to cap backloading at 900 million permits and limit the planned intervention in the carbon market to an exceptional, one-time move. The delay in sales of permits may be enacted under the condition that it has “no significant impact” on companies prone to relocating production to regions without emission curbs, lawmakers decided. “This is more bullish than the market had anticipated,” Konrad Hanschmidt, an analyst at BNEF, said today by e-mail. Energy Costs The backloading strategy has divided policy makers and industry. Opponents of the fix, ranging from Poland to steelmaker ArcelorMittal (MT) , say it pushes up energy costs during an economic slump. The EU commission and companies including Royal Dutch Shell Plc (RDSA) say intervention is needed to bolster prices that are too low to stimulate investment in clean technology. “Yes!” EU Climate Commissioner Connie Hedegaard said on her Twitter Inc. account. “Despite heavy-handed lobbying, and after very substantial debate, the European Parliament supports the backloading proposal.” The decision in favor of backloading today authorizes Matthias Groote, the lawmaker overseeing the measure in the Parliament, to start talks with representatives of national governments on the final wording of the legislation in a fast-track procedure. The outcome of the talks will need official approval by the parliament and EU ministers. Lithuania, which holds the EU rotating presidency and will represent member states in the negotiations, is ready for a “constructive dialog” on the carbon fix, the Baltic country’s Environment Minister Valentinas Mazuronis said in an emailed statement. He said he was confident the measure can be dealt with “effectively and expeditiously.” German Elections The Parliament’s decision to block the faster return of permits to the market and the creation of the innovation fund will make talks with member states easier, Peter Liese, a German Christian Democrat member of the Parliament, said after the vote. “It’ll go very fast after the German elections,” he said in an interview. Member states may decide about their position by “early fall,” according to Arunas Vinciunas, Lithuania’s Deputy Permanent Representative to the EU. While most EU countries favor backloading, they are short of the qualified majority needed to approve the proposal because several nations, including Germany, remain undecided. Chancellor Angela Merkel said in May she hoped Europe’s biggest economy would be able to tackle the plan soon after elections on Sept. 22. To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Continue reading
