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May 19, 2011 at 02:10 PM
In an almost lugubrious address about our depressed economy, one of the nation’s most influential economists could muster enthusiasm about just one investment: farmland. A New York tabloid catering to the high-net-worth and known for following the home purchases and dating exploits of the city’s socialites declares what the happening hedge fund must now own: farmland. U.S. home price deflation has now clocked 57 consecutive months, but farmland is one class of real estate that has reached a 32-year high.
Farmland is what Americans have been leaving for about a century as the United States became more urbanized. Sophisticated investors have tended to look for products emanating from urbanized university research triangles rather than rectangular plots of green acres. Today, farmland is the ultimate alternative investment. In the words of Yale professor Robert Shiller, addressing an audience of nearly 2,000 financial professionals at this week’s IMCA conference, “they don’t make new farmland.” The rise in demand for food in developing nations places a premium on farm-based supplies of agricultural commodities.
“Food prices are driving CPI,” Shiller added in his talk, yet some investors in the hedge fund world active in farmland acquisition believe that the CPI grossly understates true inflation. The New York Observer, which covers hedge funds as something of a lifestyle badge of honor, quotes an unnamed hedge fund manager as viewing an older formula used to determine CPI before 1996 as having greater validity than current calculations. According to this measure, the actual rates of inflation may be as high as 6 to 7%, more than twice the level estimated by the Bureau of Labor Statistics in its April report. Indeed, The Observer cites a blog tracking rising prices at eateries favored by its yuppie readers. The unidentified hedge fund manager is apparently putting his money where he gets his organic kale from, telling the reporter his fund is around the 15th biggest farmland owner in America now.
What a hedge fund manager will boast about anonymously cannot by itself be relied upon, but the hard facts supporting the farmland trend can be taken from the bank — specifically the Federal Reserve Bank of Chicago, which Wednesday released its first-quarter report revealing a 16% rise in Midwestern farmland values over the same quarter last year. Only one other time in the past 32 years did price gains match that level.
