When Hedge Funds Go Farming

Hedge Funds are are investing in arable land at a pace indicative of a "farmland bubble."

Price hikes resulting from the increased cost of food are challenging restaurateurs and consumers alike. Manhattan restaurant Mario Batali’s Del Posto is charging 21 percent more per meal since October, and similarly Gordon Ramsay at The London is charging sixty-nine percent more since last month, as reported by Bloomberg food critic Ryan Sutton.

Worse still, some believe that inflation has gone under-reported. Under a calculation used prior to the Boskin Commission’s 1996 reworking of the CPI formula, inflation would be much higher.

As written by Foster Kramer at The Observer:

So the logic is that not only is the dollar worth far less than we think it is, but everything is more expensive and will only move further in that direction. Especially food, the value of which may have risen due to population increases, especially in places like China, where a consumer-happy middle class has finally started to emerge.

Hedging against hyper-inflation, a number of hedge funds managers have turned to investing in farms. Scarcity, in the sense that there is a limit to the arable land still available, has some investors estimating that the value of farms to grow at 5 to 10 percent each year, on top of a commodities yield. The scenario, as described in the observer:

It may seem a little odd that in 2011 anyone’s thinking of putting money into assets that would have seemed attractive in 1911, but there’s something in the air-namely, fear. The hedge fund manager and others like him envision a doomsday scenario catalyzed by a weak dollar, higher-than-you-think inflation and an uncertain political climate here and abroad.

The pattern began to emerge sometime in 2008. “The Hedge Fund Manager Who Bought a Farm,” read the headline on one February 2008 Times of London piece detailing a British hedge fund manager’s attempt to play off the rising prices of grains in order to usurp local farmland. A FinancialTimes piece two months later began: “Hedge funds and investment banks are swapping their Gucci for gumboots.” It detailed BlackRock’s then-relatively new $420 million Agriculture Fund, which had already swept up 2,800 acres of land.

Investing in agriculture like this has the potential to distort financial markets. In Kansas and Nebraska farmland prices have risen 20% since last year. Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, has warned of a “farmland bubble” being created.

The Price Hike

The Observer: “Hedge Farm! The Doomsday Food Price Scenario Turning Hedgies into Survivalists”

Image by Jimynd