Agricultural Sprawl

[mmr]

The growth in agriculture is out of control - now they're bulldozing subdivisions full of perfectly good McMansions to put in new farms. What a waste of perfectly good land...

U.S. Farmers Reclaim Land From Developers

Five years into a brutal national housing downturn, raw land destined for residential development has fallen so far in value that thousands of acres across the country are being used again for agriculture.

During the fast-moving days of the housing boom, real-estate speculators in California, Arizona, Florida and other states paid top dollar to buy land from farmers and convert it from citrus groves and cotton fields to potential subdivisions.

Now, with crop prices soaring and housing in a deep slump, the economics of land investment have turned upside down. Farmers and investors are buying land that had been slated for development and using it for agriculture. And they are paying a small fraction of what housing developers paid for the same land before the recession.

The trend, if it continues, could represent a historic shift away from development in the far reaches of metropolitan areas. These properties had fueled much of the housing industry's bubble last decade.

In September, the Vanderweys, an Arizona dairy farming family, paid $8 million for a 760-acre alfalfa and cotton field that had fallen into foreclosure in Buckeye, Ariz., about 30 miles west of Phoenix. That same parcel, called Liberty Farm, had been sold to real-estate speculators in 2005 for $40.8 million. The Vanderweys want to plant hay....

[doom&gloom]

Re: Agricultural Sprawl

$10,526/acre?!

The buyers have to be effin' nuts to pay that for alfalfa land!

[Milton Kuo]

Re: Agricultural Sprawl

$10,526/acre?!

The buyers have to be effin' nuts to pay that for alfalfa land!

I'm not too familiar with what sane prices are for agricultural land but in a recent interview on Bloomberg, Jim Grant made mention of farm land in Iowa going for $17,000 per acre. He also mentioned that the profit one could get from leasing out the land to a farmer would be roughly 2%.

The return on investment sounds quite poor to me and reminds me of the cap rates seen in commercial real estate during the housing bubble.

[doom&gloom]

Re: Agricultural Sprawl

http://www.hfmgt.com/divisions/realestate/listings.php

this can put it all in perspective. one chunk of land is not the same as another, and most good US farmland is rated by CSR (corn suitability rating), but you don;t need prime land to grow alfalfa (which for the uninitiated is basically a form of hay). The only way i see this make sense is they either believe they have a rather captive milk market in Phoenix for eventual peak (cheap) oil, or their other landholdings cost them so little that overpaying for the present land to expand does not significantly impact ther overall operational profitability...

[jk]

Re: Agricultural Sprawl

i'm more focused on the sequence of land transactions. it reminds me of when some japanese bought rockefeller center and pebble beach at peak prices, and then sold at significant loss.

[mmr]

Re: Agricultural Sprawl

If the sale was priced that far off-market for farmland, it's possible that the buyer is paying a premium for the option value if suburban sprawl resumes someday. If the land can be farmed for a few years and then flipped to a developer at something like the extremely inflated price of five years ago, the economics may be quite a bit more reasonable.

[gwynedd1]

Re: Agricultural Sprawl

Do they know that residential real estate tends expand at a geometric rate while food demand tends to expand at an arithmetic rate? Some people are going to find out real soon.

[astonas]

Re: Agricultural Sprawl

Do they know that residential real estate tends expand at a geometric rate while food demand tends to expand at an arithmetic rate? Some people are going to find out real soon.

I was under the impression that this was a FIRE economy canard, used to explain why prices can't go down. Is there evidence that it is real over a relevant timeframe?

[lektrode]

Re: Agricultural Sprawl

interesting question, but concur with mmr: pick it up at 80% discount and bet that sprawl resumes in the not too distant future - plant alfalfa in the interim, which is low maintenance crop, easy to harvest/sell - eh D&G?

and would bet theres some sort of tax-advantaged angle to it, as well - that and here in ZIRPland, what else _would_ hold its value.. well... sides the shiny yellow stuff, of course.

[Sutter Cane]

Re: Agricultural Sprawl

one chunk of land is not the same as another, and most good US farmland is rated by CSR (corn suitability rating), but you don;t need prime land to grow alfalfa (which for the uninitiated is basically a form of hay).

Yes, one chunk of land is not the same as the other. My mother's side of the family is from Maryland. As a child we would go back to visit relatives there, and I watched every year as the areas that were formerly fertile farmland became subdivisions and strip malls, until today when the suburbs have completely consumed my grandparent's farm. The soil there was very rich and well-suited to crops, but now most of it has been paved over. There is plenty of land in the US, but not all of it is equal in terms of agricultural value.

The only way i see this make sense is they either believe they have a rather captive milk market in Phoenix for eventual peak (cheap) oil, or their other landholdings cost them so little that overpaying for the present land to expand does not significantly impact ther overall operational profitability...

Massive dairies in Arizona and New Mexico now produce milk for the entire country. This is the result of a lot of factors. Smaller, Jeffersonian-ideal family dairy farms have gone the way of the dodo. Many of these big operators in NM/AZ moved their operations there after they sold their original, smaller farms in California, and a lot of this happened since the 1990's (coinciding with the housing bubble). Suburban sprawl encroaching on their land, combined with the housing bubble, made the land in CA more valuable as real estate than it could be as a business. Or, complaints from the community about the smell or manure runoff (hey, don't move next to a dairy farm and then decide you don't like the smell of cow shit!) made moving an attractive option. They took the profits from the sale of their land and invested in HUGE (thousands of head of cattle) dairy operations in the desert. These dairies don't just ship to nearby communities like Phoenix, they ship all over the country. There is a cheese plant in Roswell, NM, that produces a majority of the mozzarella used on pizza for the whole country.

Remember, most of the growth in this area in this part of the country sprung up quite recently. I think this kind of consolidation has the potential to be very adversely affected by peak cheap oil. Will it still be cost-effective to truck milk and cheese from the desert all over the country when fuel is much more expensive?

It's not like it's going to be easy to decentralize agricultural production like this in the face of increased fuel costs. A lot of expertise has been lost. The smaller dairies that used to produce milk in local markets are long gone, and the kids who might have taken over those farms have long since moved to the big city (*ahem*) and won't be going back to shoveling manure...

[Sutter Cane]

Re: Agricultural Sprawl

On that note, c1ue just posted this in another thread: http://en.wikipedia.org/wiki/Latifundium

The latifundia quickly started economic consolidation as larger estates achieved greater economies of scale and senators did not pay land taxes. Owners re-invested their profits by purchasing smaller neighbouring farms, since smaller farms had a lower productivity and could not compete, in an ancient precursor of agribusiness. By the 2nd century AD, latifundia had in fact displaced small farms as the agricultural foundation of the Roman Empire. This effect contributed to the destabilizing of Roman society as well. As the small farms of the Roman peasantry were bought up by the wealthy and their vast supply of slaves, the landless peasantry were forced to idle and squat around the city of Rome, relying greatly on handouts.

Absolutely fascinating!

[gwynedd1]

Re: Agricultural Sprawl

I was under the impression that this was a FIRE economy canard, used to explain why prices can't go down. Is there evidence that it is real over a relevant timeframe?

My point is that people will often buy up to a large palace, meaning the upper limits are far higher than the maximum one can eat. This has been the bane of the food industry and they have tried to increase sales by becoming cooks as well. Its a lousy way to make a buck. The only way you can is to bribe governments to buy it.

[thriftyandboringinohio]

Re: Agricultural Sprawl

My point is that people will often buy up to a large palace, meaning the upper limits are far higher than the maximum one can eat. This has been the bane of the food industry and they have tried to increase sales by becoming cooks as well. Its a lousy way to make a buck. The only way you can is to bribe governments to buy it.

Excellent points, gwynedd1.

Many years ago when I was a young engineer, an older engineer offered something fascinating. He said that way back in the early 1900s, a professional engineer or chemist or accountant was paid highly enough that he might have a cook at home. He next said that we need to remember that in 1908, Sunday dinner was made from true scratch -the cook would make roast chicken and apple pie starting with a live chicken, a sack of flour, and a bushel of apples, and work all day to get the meal on the table. He told me that the convenience foods we enjoy semi-prepared might account for the difference. Today's busy middle class professionals pay the cook's wages to the food company, and Green Giant and Pillsbury now collect the cook's wage.

[doom&gloom]

Re: Agricultural Sprawl

interesting question, but concur with mmr: pick it up at 80% discount and bet that sprawl resumes in the not too distant future - plant alfalfa in the interim, which is low maintenance crop, easy to harvest/sell - eh D&G?

and would bet theres some sort of tax-advantaged angle to it, as well - that and here in ZIRPland, what else _would_ hold its value.. well... sides the shiny yellow stuff, of course.

Alfalfa is easy for dairy cows to eat. I doubt they sell the stuff if they have a massive operation.

I looked at the satellite photo on Google of the area. It is an ag oasis in a valley surrounded by nothing that grows. Looks like a good river runs thru there for pumping and irrigating the fields.

When we move to more localized ag land, they may well be sitting pretty but current prices are ridiculous. I find it hard to see how they get any return on the land unless it is blended into a much larger and cheaper parcel overall. And the dairy industry has never made anyone rich, either.