Gauge signals

Sometimes investors ignore the fact that the fundamentals supporting their position have disappeared.

This is rather like the cartoon road runner, who kept on even though the ground underneath him disappeared – and he then went over a cliff.  

The basic delusions about farmland prices no longer exist yet prices spiral upwards, soaring even more than house prices. 

Still, there is little justification for this rise which now presents a clear danger signal. Farmland prices, of course, should have as their basis the prices of commodities and the profits the land can produce.

A review of crop prices is frightening. For example, the price of wheat has fallen from $847 a bushel to $459 recently. Corn has experienced a similar collapse, from $763 a bushel to $360 a bushel, while soybeans have declined from $1,440 a bushel to $825. Yet farmland prices have continued their upward path.

Clearly, sooner rather than later, there must be some correlation between the land price, the produce realized and return on investment where the crops are grown.  There is an adage that governments cannot print more land, unlike currencies, so there are other factors at play.

Farmland can be taken over for other purposes such as housing, assuming no zonal restrictions.

Yet house prices seem to have peaked. Internet rates appear poised for higher rates and the down payments, important components of house prices, have been raised so speculative enthusiasm should be ending, particularly as population rates of growth have slowed.

Urban restrictions of building are not being extended due to population protests. City limits probably will remain fixed.

Corporations do not need more land as capital spending for that remains sluggish and there is little prospect it will be ending soon regardless of government incentives.

Schools and universities now are plagued by declining enrolment so that should not be a factor as more building is not in the cards.

If the move to outlying areas remained, the demand for more land would accelerate but millennials seem to be gravitating to cities. Witness the huge expansion of urban condominiums.

With declining farmland crop prices and slower demand for land by business and social spending, it is difficult to see what will fuel the need for more land. Prices simply must reflect that situation.  There is no way of foretelling when this baseless enthusiasm will end. 

However, time and time again land booms have a way of collapsing, triggering tumultuous upheavals.  One has only to recall the absurd.

 

 

Bruce Whitestone

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