Contrarian Investor Warning: Harvest Time for Farmland Investments

Tue, May 22, 2012

We’ve been longtime agriculture bulls. But as contrarian investors, we’ve had to pick our spots.

The wild swings in agiculture stocks and farmland over the years had made picking those spots very easy and profitable. After jumping onboard on the agriculture bull 2006, off in the summer of 2008, and back on again at the market bottom in the fall of 2008, we’ve hit every time just right.

Contrarian Investor Warning: Harvest Time for Farmland Investments

Granted, we weren’t popular any of those times. Each time most investors thought us fools. Time, however, proved us right. And now it’s looking like agriculture investments could be headed for a big down leg.

Again, our position isn’t popular. As of today 22 of the 31 analysts covering agriculture bellwether Potash Corp (NYSE:POT) have either a “buy” or a “strong buy” rating on it. But there is one analyst seeing tough times ahead in agriculture.

Peter Brandt, a commodities trader, says “markets are getting set up to slam the speculator.” And one of the biggest slams will be felt in agriculture.

In 5 Money Moves a Commodities Bear is Making Now, Brandt wisely points out:

Harvest crop profits

Corn (US:CN2) and many other crop prices are as high as, well, an elephant’s eye — “Too high,” Brandt said — and the trader said he’s short-selling grain futures in anticipation of the agriculture investing theme playing itself out.

In the supply- and demand-driven world of commodities, “there’s nothing that cures high prices like high prices,” he said.

Plow under farmland

Agriculture products are in a bubble, and so is the land they grow on, Brandt said.

“The price of farmland is at an obscene level,” he said. “It’s impossible to make money by being a farmer, and the land can’t be justified as an investment.”

Farmland, largely in the Midwest grain belt, has been one of the few bright spots in the U.S. real estate market. Agricultural land prices rose 3.8% on average in the first quarter, the strongest start to a year since 2006 and the second-highest going back to 1991, according to the National Council of Real Estate Investment Fiduciaries.

For example, farm acreage values rose 24% in Iowa and 17% in Nebraska in 2011, according to the National Agricultural Statistics Service. Double-digit yearly gains for farmland were also realized in Illinois, Kansas, Indiana, Minnesota, South Dakota and North Dakota.

The main drivers of this land rush — high grain prices, Asian demand, weather-plagued supply — have reached unrealistic territory, Brandt said.

“When the reality comes in that grain prices have seen their best for sometime in the future, there starts to be nervousness about owning $15,000 an acre in Iowa,” Brandt said. “The only reason you own farmland today is the belief that you can sell it to the next sucker for more than you paid.”

His warning to investors who have exposure to farmland: “Scramble quickly. Land is not a liquid asset. You want to sell it on the way up.”

Brandt is spot on.

Just six months ago on December 16, 2011 we noted the surge in farmland prices:

Even our long-time favorite safe haven — farmland — has jumped back into bubble territory. When we first advised the purchase of farmland a few years ago, it was unheard of…

But last week, a new “bubble marker” was set in Iowa when a farm sold for $20,000 an acre. Iowa farmland was selling for an average of $1,926 an acre back in 2001.

Farmland and agriculture commodities are priced for perfection.

The economic problems growing in China, continued problems in the Eurozone, and years of aggressive overspeculation in agricultural commodities in farmland will likely come together in the next few months to create a major correction.

We’re still long-term agriculture bulls. But we’re avoiding the sector right now.

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