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Farmland
has produced extraordinary returns these past few years -- a big-picture
trend that could continue.
There is an old saying among
traders: "If you're going to bet the farm, be sure to have two
farms."
These days, three farms are
better than two. And four are better than three. In fact, the more farmland
you can lay claim to, the better.
Perry Vieth
took this idea to heart. He oversees 61 farms spread across four states:
Illinois, Indiana, Michigan and Tennessee.
Vieth, a former securities lawyer and
fixed-income trader, quit his job as a portfolio manager in 2008 to focus on
farmland full time. He and a partner co-founded Ceres Partners LLC, an
investment fund for farmland. As Bloomberg reports:
On a spring afternoon, Vieth, 54, barrels along backcountry roads in a Jeep
Cherokee in Indiana and Michigan to scout a fruit orchard and corn and
soybean farms to buy. Rural towns with names such as Three Rivers pass by in
a blur, separated by a wide horizon of fields with young crops popping up.
"When I told people I was
leaving to start an investment fund in farmland, they said, 'You're doing
what?'" says Vieth, in a red polo golf shirt
and khakis. "It will always be difficult for Wall Street firms to
understand. It's not like buying stocks on a computer."
Vieth made a great move at a great time.
Ceres Partners has returned an average annual gain of 16.4% after fees,
according to Bloomberg, from January 2008 through June 2011. While the world
was melting down and portfolios were imploding, sunshine and soil were
producing excellent returns.
Focus on
Farmland
Large hedge
funds are aware of this trend. They are pouring billions into
fertile regions of Europe, Australia, Brazil and North America with an eye
for long-term gains.
"I have frequently told
people that one of the best investments in the world will be farmland," says
the original agriculture bull Jim Rogers. "You've got to buy in a place
where it rains, and you have to have a farmer who knows what he's doing. If
you can do that, you will make a double whammy because the crops are becoming
more valuable."
In Britain, farmland values have
doubled in the past five years and tripled over the past 10. The Royal
Institution of Chartered Surveyors, or RICS, noted the fourth straight
increase in a six-month period for British land.
Some argue that farmland is even
more of a true "safe haven" than precious metals. As you know, it's
impossible to eat gold.
Political trends further support
farm values, like this one via the Financial Times:
US ethanol refiners are
consuming more domestic corn than livestock and poultry farmers for the first
time, underscoring how a government-supported biofuels industry has
contributed to surging grain demand.
The US Department of Agriculture
estimated that in the year to August 31 ethanol producers will have consumed
5.05bn bushels of corn, or more than 40 per cent of last year's harvest.
Animal feed and residual demand accounted for 5bn bushels.
China also plays its part, as
markets realized in July. The dragon ordered 21 million bushels of U.S. corn
"in one hit," the WSJ reports, "more than the U.S.
government thought the country would buy in a year."
Long a big buyer of soybeans,
China became a net importer of corn for the first time in over a decade.
It's hard to know what the
country's total grain needs are, the WSJ adds, because China is
"secretive about the levels of commodities it holds in its strategic
reserves."
One way to visualize the
farmland trend is in the value of the PowerShares DB
Agriculture Fund (DBA:NYSE).
DBA is designed to track the DB Agriculture Index, through a basket
of liquid and popular commodity futures contracts. For example, DBA offers
basket exposure to cattle, cocoa, coffee, corn, cotton, soybeans, sugar and
wheat.
In recent trading DBA had gone
sideways for many months, suggesting consolidation in a range.
The drop below the range came
during the dark days of Aug. 8-10, when the stock market went into free fall.
DBA's ability to hold up reasonably well during that time,
and even bounce back and reverse course, is a clear sign of strength.
As the global economy slows,
markets could get even more volatile -- with no small thanks to government
crosscurrents. (Remember when a 200-point move in the Dow was huge? Now it's
practically "business as usual" again.)
Farmland, though, has the
potential to keep riding the powerful undercurrents of nutrient scarcity,
safe-haven demand and emerging market growth.
Justice
Litle
Taipan
Publishing Group
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