08 October 2014

Not Just Iowa Anymore

A few years ago I posted here, here, and here about the extraordinary prices Iowa farmland was fetching. I also observed that part of the run-up was due to the incentives created by the U.S. federal government's subsidy of ethanol production. For some strange reason I thought that turning food into fuel was not a good idea.

But looking across the pond, at England in particular, we read in The Economist (here) that English farmland is also experiencing a dramatic rise in value. The English situation differs from that Stateside for several reasons. First, there's simply much less arable land in England than the United States. In addition, "farmers are growing richer. They have benefited from a global surge in commodity prices: wheat, for example, is 80% more expensive than it was five years ago. As commodity prices rise, banks have been more willing to lend."

The Economist does not opine on the reasons for the world-wide increase in commodity prices but I suspect it has to do with the increasing demand for meat and processed food in the developing world. As millions of Chinese and Indians move from poverty to something like a middle class lifestyle, their taste for what Westerners have enjoyed for generations increases as well.

And, for what it's worth, prices for all commodities have not increased. The driver of of the astronomical prices for Iowa farmland was high prices for corn (maize) and soybeans and both have fallen dramatically since 2012. It remains to be seen if highly-leveraged Midwestern farmers (and their banks) will be able to hang on to what they bought.

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