Article

by Carey Gillam

BOSTON (Reuters) - Fears that rising farmland values may be building toward a bubble which could burst and deal a blow to the still-shaky U.S. economy are overblown, according to a leading U.S. farmland investor.

The fundamental factors driving rising farmland values are long-term and are coupled with low debt levels in the sector, indicators not commonly associated with asset class “bubbles,” said Hancock Agricultural Investment Group (HAIG) president Jeffrey Conrad in an interview with Reuters.

“You cannot look at farmland values in a vacuum. You have to look at your earnings as well, and when you look at that you get a different story,” Conrad said. “I don’t think we have a bubble.”

Boston-based HAIG manages about $1.3 billion of agricultural real estate for institutional investors, including public and corporate pension funds and corporate taxable investors, and is among the largest U.S. players in this space.

The group oversees about 210,000 acres of U.S. farmland across the country, in key Midwestern corn and soybean-growing areas and in California.

Banking officials, including Federal Deposit Insurance Corp Chairman Sheila Bair, have been growing increasingly vocal about rising values for U.S. farmland.

Farmland prices are 58 percent above their 2000 levels in inflation-adjusted terms, according to the FDIC. Unlike other real estate assets, farmland prices have not fallen during the economic downturn, and both state and national bank regulators are eyeing potential weaknesses in the sector.

Still, Conrad said his group continued to actively buy up U.S. farmland despite rising values that have key corn and soybean land in the U.S. Midwest and Plains commanding over $7,000 an acre in some cases.

“The sector hasn’t levered up and we’ve seen absolute paydown in debt,” Conrad said. “These are signs you don’t see before a bubble.”

Conrad said he takes heart from recent USDA data that shows the leverage position of the U.S. farm sector continues to decline.

In a November internal report, HAIG said a combination of USDA data and its own research shows the leverage position of the farm sector represents a 39 percent decrease in real terms from a peak debt level in 1981.

The HAIG report said debt to equity declined to 14 percent from 22 percent from the peak through last year, and debt per acre dropped from 31 percent, while net farm income per acre increased 52 percent.

A University of Illinois study issued last month said that, at least over the next year or two, farmland values appeared solid thanks to low interest rates and consistent farmland returns. Cash rents continue to increase as commodity prices climb.

Hancock said even though the lofty prices now being commanded by corn, soybeans and wheat in the U.S. futures markets may not be sustained over the long term, farmland returns for investors have remained consistently in the black despite swings in commodity prices over the last several years.

A growing global population and strong export demand for corn, soybeans and other crops, combined with a weaker dollar that further enhances the competitiveness of U.S. commodities, are all factors favoring further gains in farmland values.

“The real unknown that we are all facing is will the demand continue to grow in China and some of these emerging markets,” Conrad said. “As long as we have a strong export market ... I don’t think we are in a position to see a bubble here.”

(Reporting by Carey Gillam; editing by Jim Marshall)