TheCityFarmer

UK Land Survey – The wrong angle?

thecityfarmer — Thu, 14 Feb 2008 00:09:00 +0000

The UK Royal Institution of Chartered Surveyors recently published their report on the Rural Land Market Survey for second half of 2007. The highlights of the report were that arable land prices rose by 29.6% in 2007 year on year, and broke the £10,000 per hectare mark for the first time. This really should come as little surprise given the rapidly increasing farm returns during the period.

A number of articles ran in the broadsheets, such as the Guardian and FT, covering the report. However, TheCityFarmer thinks that the angle these stories took, to focus on the expected retreat of buyers from the city as a result of the credit squeeze, hides the more important conclusion. While there is no doubt some merit in that argument (and by the way the nervousness in the City is palpable at the moment), but the survey tells us that ‘non-farmer individuals’ only account for 37% of buyers so the impact of the city slowdown on the land market as a whole will be limited; especially as that 37% certainly do not all hail from the City.

TheCityFarmer sees the most interesting finding to be the future price expectations of RICS members, which is reported to be around 50% growth on 2007 values – the most buoyant expectations since the survey began. If these predictions were to play out during 2008 we would see prices in the region of £7,500 per acre, a situation that could well signal a bubble. As we know bubbles are liable to burst.

At a sustainable high? – Part II

thecityfarmer — Mon, 11 Feb 2008 22:37:01 +0000

Apologies for the delay in coming back to this post, time seemed to race away this week. In part I we saw how the agricultural commodity prices were at record heights, or at least those long since seen. The pertinent questions for the farmer and investor alike are is the high sustainable and is there any further upside? TheCityFarmer looks at the influencing shifts of both supply and demand in the global market. There are 3 factors that need to be considered. Firstly lets take population. All we really need to understand is that population growth is expanential. An important text on the issue was first published in the 70′s and commissioned by the inticingly titled Club of Rome. The Limits to Growth was a controversial study that sought to model the effects of increasing economic and population growth on the finite resources that our world supplies. One such resource is food. As the absolute number of extra people in the world accelarates year on year, the pressure of demand on all commodities is heightened, including wheat and other cereals. Population growth is nothing new and so it is difficult to attribute the relative recent steep gains only to that. We can look back to the Limits to Growth, for the second factor which is economic growth. We have in recent years seen unprecidently rapid economic growth the developing world; most particularly in China and India - both with huge populations. Hand in hand with economic growth comes changes to the consumption habits of food including more meat and a generally more western diet.

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If the Chinese consume resources in 2031 at a level that Americans do now, grain consumption per person there would climb from around 600 pounds today to around 2000 pounds needed to sustain a typical western diet. This would equate to 1,352 million tons of grain, equal to two thirds of all the grain harvested in the world in 2004. OneWorld

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As the statastic above shows this development could have a truely fundamental impact on the global market. Now on to the third factor; the ever increasing use of biofuel has quite suddenly provided an additional and fierce increase in the demand for combinable crops. This is placing added pressure on land usage around the world. Whereby land once used for growing wheat is now utilised in the supply chain of bio ethanol and diesel producers. The main input to this industry is corn. The graph below shows that dramatic increase and how further growth is still expected.

US Economic Research Service of the Department for Agriculture

While there is much debate around the environmental and economic benefits of biofuels (debates TheCityFarmer is likely to post on in the future) for now it is enough to comment on the fact that demand for farm products has increased to serve the growing biofuel industry and the supply of crops that are not used in biofuels are impaired as land is turned over the produce those that are.

So is the price sustainable? The 3 factors I describe are not going to go away anytime soon. TheCityFarmer believes the important factors to watch for in the medium-term are the global price of oil, if it were to fall significantly it would damage the competitiveness of the Biofuel industry. Also further developments in the industry which enables significantly more efficient energy transfer, or transfer from material that is not in the traditional sense “farmable”, could well reduce the demand. Secondly and most importantly, the question is how much under-utilised land is out there that could be brought into use (and of course high commodity prices add to the incentive to do so) to satisfy this extra demand. It is quite possible that a more productive agriculture industry in the land rich developing world could increase output sufficiently to meet the extra demand, which could have a very positive impact on the development of some of the poorest nations and act to supress prices.

It is difficult to predict, but on balance TheCityFarmer would expect, at least for the next few years , prices to remain at similar levels as today, if not rise further still. But to sustain these levels into the long-run is more unlikely, however that said it is quite possible that we will not see the days of wheat at £60/ton again in a hurry.

25bp Cut

thecityfarmer — Thu, 07 Feb 2008 21:57:40 +0000

Just a quick note, to confirm that interest rates in the UK were, as expected, cut by a quarter of one percent earlier today. In the statement released by the Bank of England, they were keen to stress the importance of containing inflationary pressure.

While the benefits of the easing are somewhat marginal to our farm, even though we are paying a mortgage, it is of course still welcome.

BoE Interest Rate – A difficult decision.

thecityfarmer — Tue, 05 Feb 2008 00:32:57 +0000

Bank of England Governor Mervyn King and his comrades on the Monetary Policy Committee will sit this Thursday to determine the BoE policy interest rate for the month ahead. TheCityFarmer considers the likely outcomes.

Given the recent sharp rate cuts by the Federal Reserve on the other side of the Atlantic, and the weak housing data (and resultant pinch on consumer spending) it seems that there is one of only three choices available to the MPC; an unchanged rate or easing of .25% or .50%. The committee has to strike a fine balance between easing rates to fend off the increasingly evident slowdown in the UK economy, and sending a signal to exacerbate the increasing fears of rising inflation. There has been a surge in such inflationary expectations since the new year. A January pole conducted by YouGov and Citi, showed that 80% of the general public surveyed expected inflation to exceed the 2% government target. While one may not consider the public’s expectations and perceptions to be an important determining factor in the MPC’s decision, the Governor himself noted in his 2007 “MPC 10 Years on” speech that “the anchoring of inflation expectations has been central to the stability enjoyed by the UK economy over the past decade. The lesson to learn from economic theory is not to take those expectations for granted – they depend on the actions of the MPC.”

Given these fears TheCityFarmer expects the Committee to err on the side of caution and plumb of the less drastic easing of a quarter of a percent. While only time will tell the outcome and late economic data available close to the meeting might well have an impact, the expected cut would be welcomed by this farmer and many others with long-term floating rate loans on their balance sheet.

The Price of Wheat – At a sustainable high?

thecityfarmer — Sun, 03 Feb 2008 19:44:40 +0000

As we know, wheat and other cereals have been enjoying a healthy period of a price growth over the last few years, and at the time of writing it is at a peak not before seen. So TheCityFarmer aims to explain some of the possible causes.

There are a number of factors that can shed light on the increase illustrated in the chart below. Often commentators will cite the difficult harvests experienced by those in important cereal producing nations such as Australia. While this has, no doubt, made a contribution to the price by squeezing supply, it does not offer a long-term explanation.

Feed Wheat Price Chart

To predict that the recent rises will be sustained into the long-term one would have to be able to point to some structural factors having a material impact on the forces of supply and demand in the market. While measuring the magnitude of the affect is a vastly complicated matter that would require a great deal more inquiry than we can muster on this blog, TheCityFarmer is confident that there are forces, which are still in their early stages of development, which could indeed have the material impact required to sustain or even continue to drive up prices. So what are they? Feel free to leave your opinions in the comments field, but TheCityFarmer’s answer will have to wait for the next post which will be soon-coming.

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Part II of this post is now available here.