Wichner says he buys property as he gets money from investors. He adds that the going was slow for a couple of years, but that the number of investors has doubled since the start of this year. Wichner also notes that the properties are generating revenues right now, but that Farmland LP is re-investing the money into the conversion of the land from conventional to organic. He's made clear to investors not to expect returns until after the conversion process has been completed.
Stable Source Of Value
Land prices collapsed amidst the farm crisis of the mid-1980s. But since then, land has performed as an excellent inflation hedge. According to the National Council for Real Estate Fiduciaries Farmland Index, the internal rate of return for U.S. farmland during the last two decades has been about 15%.
Wichner likes to compare an investment in farmland to owning long-term bonds.
"Ben Bernanke is working against me by printing money when I own a bond," he says. "[He] can print more money, but there's a diminishing supply of farmland. It's a great stable source of value, and the crops that grow on the land drive inflation."
Investors generally buy land at a 3.2% yield, he says, which is the price farmers pay to lease it. But as the value of the land has appreciated, the yield on the investment has also grown. "If you bought in l999 at $1,400 per acre," he wrote in a presentation, "you would be getting nearly 7% cash flow [on the original investment] today, plus 7% appreciation."
Ticking Time Bomb
But despite the farming boom and growing concerns there may be a farmland bubble in the Midwest, there has been less attention paid to the escalating cost of inputs that have become de rigueur in conventional agriculture-fertilizer, herbicides, pesticides, GMOs and fuel. According to the USDA's Economic Research Service, yields increased 30% between l989 and 2009. Meanwhile, the cost of inputs tripled during the same 20-year period.
According to Richard Heinberg, senior fellow at the Post Carbon Institute (PCI), agriculture accounts for 16% of the U.S. annual energy budget-more than any other industry.
The use of energy not only includes fuel needed to transport crop from fields to processors to food stores, it also runs the gamut from powering farm machinery and irrigation pumps to maintaining animal operations and drying and storing crops. In addition, natural gas is used to make fertilizer and oil is a feedstock for pesticides and herbicides.
The bottom line, Heinberg writes in a paper published by PCI that he co-authored with Kentucky State University fellow Michael Bomford, is that the "largest potential cost" resulting from the industrialization of agriculture may be "the extreme vulnerability of the entire system to global fossil fuel depletion."
According to Wichner, this means that conventional farmers will continue to be squeezed.