tjbresearch.com
Monday, May 23rd, 2011
up on the farm

The common phrase is, “down on the farm,” but that’s if you haven’t taken a look any time recently.  These days, for those that put crops in the ground, everything is up — prices, yields, input costs, and the dirt itself.  About the only thing that hasn’t moved higher is the cost of borrowing money.

LinkedIn dominated the market chatter last week, so if someone was to do a piece on valuation, expectations, and the proclamations of bubbles, that would be the hot topic to address.  Alas, things move pretty slowly in the puzzle cave and there already has been much written about that social networking site and its IPO.  So, I’ll instead return to the land — farmland — that has in many ways become the “it” asset class of the day.

In March, Robert Shiller was widely quoted as saying that farmland was his “favorite dark-horse bubble candidate for the next decade or so,” that it seemed to him to have “the most contagious ‘new era’ story right now.”Bloomberg | Shiller’s comments accompanied the “chart of the day,” which showed the performance of farmland over time. More recently, he has apparently become a believer himself:  “My only bullish call is farmland.”  According to a published report, Shiller cited its “limited supply” as the foundation of his call.InvestmentNews | He was speaking at the annual conference of the Investment Management Consultants Association.

The current fundamentals seem supportive of such an argument, so there’s no need to dispute that here.  However, they seemed equally supportive in the late 1970s before a nasty drop in land prices that wiped out a lot of farmers (and the businesses that sold to them).

To put the question in further perspective, let’s go back to LinkedIn and a posting about it by Todd Sullivan.ValuePlays | Sullivan “seeks to buy undervalued issues with an upcoming catalyst.” In response to those who claim that valuation doesn’t matter for a hot stock like LinkedIn, Sullivan simply says, “That’s a crock.”  I agree, as indicated in a recent pix, when I wrote that changing price levels alter “the matrix of probabilities” regarding future returns.research puzzle pix | Check Point (CHKP), the topic of the posting, is another of those easy examples of why that is the case.

But you only get an idea of that matrix if you actually use numbers to try to quantify the possibilities, to attempt to understand whether you are far out on a limb of low-probability hopes or on the thick part of that limb, up against a massive trunk of true economic value.  Either way, a storm could come along and knock you to the ground.  However, on one end of the limb, little more than a prairie gust could do it.  On the other, it would take an economic tornado.

So, what are the numbers that Shiller uses?  How does he think farmland is valued right now?  Furthermore, how many in the army of ag acolytes have actually looked at farm-level economics to think through the problem?

Saturday’s New York Times included an article on the risks and rewards of private placements, which mentioned the rationale for an upcoming one that will hold farmland for its investors:  “The attraction is the promise of steady returns in an asset class that has historically done well in both uncertain and inflationary times.”New York Times | The title of the article is, “An Investment Asks, How Much Can You Afford to Lose?” Really?  If that’s the pitch, I’d like to see the numbers used in the offering document.

And I’d like to see some decent work on what might happen if you buy farmland at the prices being paid in the Upper Midwest today.  What are the likely long-run returns given a range of crop prices, of yields, of costs, of interest rates?  I’d be glad to use such analyses to make a judgment about the wisdom of locking up capital for years — if only I could find them.

In my mind’s eye, I see a fellow in dirty bib overalls and a decade-old seed cap, pulling a pencil from behind his ear and using the back of a piece of paper to do some simple math.  I don’t know what numbers he’ll come up with, but if he can’t make them work, no one can.  All the pretty charts and global context and extrapolated trends won’t matter if the figures once learned in the one-room schoolhouse down the road don’t add up.