On December 31, 2012, I read an article in Bizmology titled “California
Farmland Prices Soar.” This was not 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 were to become 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 to 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.

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 hosts a “Farmers’ Market” at least once a week where locals can buy 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 for domestic consumption 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!

Then of course there is the factor that land as a commodity is finite – they
aren’t making any more of it. Land is a hard asset and a hedge against inflation
and a devaluating dollar. And income producing land is icing on the cake.

And so, I dig into my salad made from produce fresh from the farmer’s market
and topped with diced eggs from my neighbor’s hen house. Then with a sip of
wine made from locally grown grapes, I realize that buying farmland must be a
great way to go.

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