U.S. Farmland Boom May Be Coming To An End

According to a Bloomberg article, the boom in prices for U.S. farmland could peak this year amid a rise in interest rates and fall in crop prices. The article is based on a report from Rabobank International. In an interview, the bank's management team said that land prices could fall by as much as 15% after rising as much as 70% in Nebraska to 20% in California. The bull market in farmland was spurred on by record grain and livestock prices combined with ultra-low borrowing costs. The Rabobank report states, “margins are once again expected to diminish as increases in the volume of commodity production combine with higher input costs to squeeze profit margins,” the analysts said in the report. “The result should be a slowing in U.S. agricultural land value growth, accompanied by occasional sharp decreases.” According to government estimates, the boom in agricultural prices will generate record income of $94.7 billion this year for American farmers. The windfall, along with the Fed's ZIRP interest rate policy has helped fuel speculation on farmland prices. As supply catches up with demand, however, and interest rates rise, the value of productive agricultural land could correct. This doesn't mean that farmland is all of a sudden a bad long-term investment, however. According to Sterling Liddell, a vice-president for food and agribusiness research at Rabo AgriFinance, the cost of agricultural land is justified by the income generated and the investment isn't a bubble. Furthermore, the ratio of debt to equity in farm property has been declining since the mid-1980s and most producers would be unaffected by a correction in prices after the boom. ACTION ITEMS:

Bullish:
Traders who believe that land and crop prices are not in a bubble and will continue to rise might want to consider the following trades:

• Deere & Co. DE - This stock has benefited substantially from the agricultural boom.

• Fertilizer names such as Mosaic MOS, Potash POT and CF Industries CF.

• Grain futures, such as corn, wheat, and soybeans, which have suffered a sharp correction in recent weeks.

Bearish:
Traders who believe that the rise in land and crop prices are set to suffer a correction may want to consider:

• The PowerShares DB US Dollar Index Bullish ETF UUP. If interest rates rise and speculation in commodities abates, the Dollar should benefit.

• Shorting the PowerShares DB Agriculture Fund ETF DBA which tracks the performance of a basket of agricultural commodities.

• Shorting fertilizer stocks which have seen dramatic rises over the last year as demand for fertilizer has mirrored the bull market in crop prices.

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