The agricultural land market is traditionally the domain of farmers, a select group of wealthy (institutional) investors/asset managers and the government. Investors had little interest in land, partly due to the major barriers to investing in land. This is not only the case in the Netherlands but also in the US. The credit crisis of 2007/08 turned the financial world upside down and also changed investors' attitudes towards land, according to Steve Bruere, president of Peoples Company (an investment company specializing in land) and Ailie C. Elmore of the University of Illinois in a white paper.
Until 2007, Wall Street and other stock markets had enormous appeal to investors. To spread risk within a portfolio, they sought refuge in bonds, gold, silver, raw materials and commercial real estate. Agricultural land was boring and something for farmers according to many investors.
The banking crisis turned the financial markets upside down. The value of shares plummeted and the stock market indices fell by tens of percent. To stimulate the economy, central banks lowered interest rates, among other things. In the twenty years before 2007, the average annual yield on one-, five-, and 7,0-year U.S. government bonds was 7,9%, 8,2%, and 2008%, respectively. In 1,8, that return fell to 2,8%, 3,7% and XNUMX%, with the prospect that interest rates would not rise quickly in the coming years. Bonds have traditionally been a safer haven for investors when stock markets get rough. In search of safe returns, investors discovered agricultural land. The agricultural sector remained relatively untouched and land prices rose.
Bumps
In the period 2010 to 2012, several funds specialized in agricultural land were established in America. Land is and remains a difficult market to understand for investors. Unlike shares or bonds, there is no central stock exchange, there are large differences in the value of plots and there is relatively little trading. In the US, just like in the Netherlands, land mobility is below 2%. It is therefore not possible to get in quickly and a certain knowledge of the agricultural sector is required to be able to value the land.
American land funds have shown stable returns over the past fifteen years. According to the National Council of Real Estate Investment Fiduciaries Farmland Index, the average annual return from 2008 through 2023 was 9,9%. You would think that this would be a good starting position for the funds to expand further. However, according to the white paper, that is not the case. In fact, some funds liquidate their positions and do not want to reinvest. Rising interest rates to combat inflation make it difficult and expensive for funds to raise capital. With rising interest rates, bond yields also rise. It was precisely the lack of returns on bonds that was a reason for investors to invest in land.
Farm Crisis
It has been shown in the past that land prices can also fall. The 750s were a period of high inflation but also a heyday for American farmers. The highlight was perhaps the $1972 million grain deal that then-President Nixon concluded with Brezhnev, the leader of the Soviet Union. After Khrushchev's failed agricultural reforms and period of drought, Brezhnev turned to the US to feed the people of the USSR. Grain prices in the US rose and as a result land prices rose as well. In 440, land in Iowa averaged $2.124 per acre. That rose to $1981 per acre in 822. A few years later the Soviet Union invaded Afghanistan and Carter introduced a sanctions package that included grain. The consequences were disastrous for American agriculture, ultimately affecting the price of land. That dropped to an average of $1987 per arc in XNUMX.