On December 31, 2012, I read an article in “Bizmology” titled “California Farmland Prices Soar.” It wasn’t the first I’ve heard on the subject; even during the worst years of the economic downturn (2009, 2010) agricultural land clearly had a strong bid under it. But this article written by Rebecca Mallett made the interesting point that insurance companies and pension funds have recently begun to buy West Coast farmland. These are not farmers or individual investors buying farmland; this is bond money, one of the biggest capital resources in our economy.
I wanted to know what farmland they were buying, and where, because if this phenomenon became widespread, these vast sums of money could be a big factor to drive up prices. With a little digging I found out that Prudential Financial (insurance) has just recently put money to work in Ventura County lemon and avocado farms, as well as in Central Valley almonds, and Santa Cruz strawberries.
Insurance funds and pension funds are highly conservative with regard to “risk” tolerance and have traditionally placed their funds primarily in the bond market and very conservative investment instruments. And yet a spokesman for Prudential’s agriculture investment portfolio asserted that they view farmland as having lower risk than bond and equity funds, with possibly higher returns. If large sums of money begin exit the bond market in this low interest rate environment, and if farmland is a targeted alternative, will that exodus from bonds continue to fuel the surge in demand for farmland, and in turn the surge in prices? Many say that the bond market exodus is just beginning so we could be in the early stages of this trend.
But clearly the desire to acquire plantable farmable land is not just institutional – many individuals want to purchase land that is in some way productive. For one thing, income to support property ownership is a huge plus as people on the whole have become more mindful of sound money management. Farming income can offset the cost of property ownership, create some possible tax advantages, and may bring positive cash flow as well.
Also the concept of being sustainable and self-sufficient has become popular and wide-spread, and the opportunity to grow one’s own natural wholesome produce is a dream come true for some. Clean, healthy, chemical free “organic” produce is in high demand. Consider the amazing success of the Whole Foods Market franchise in recent years, even with the economic downturn. Apparently shoppers have not been deterred by the fact that prices at Whole Foods Market are significantly higher than prices at ordinary super-markets. Almost every community has a “Farmers’ Market” at least once a week where locals can by organic produce fresh from the farm. It appears that people want wholesome good food and they seem to be willing to pay for it.
California’s agricultural industry produces over $33 billion per year. Produce is not only domestic but is also an export commodity. China’s emerging middle class has generated a strong demand for almonds and other fruits and nuts grown in California’s Central Valley. World-wide population growth, along with a strengthening consumer in emerging markets, implies that demand for agricultural products will continue to grow. And grow. And grow!