On the rare occasion that New Yorkers talk about farming, it's usually something along the lines of what sort of organic kale to plant in the vanity garden at the second house in the Adirondacks. But on a recent afternoon, The Observer had a conversation of a different sort about agricultural pursuits with a hedge fund manager he'd met at one of the many dark-paneled private clubs in midtown a few weeks prior. "A friend of mine is actually the largest owner of agricultural land in Uruguay," said the hedge fund manager. "He's a year older than I am. We're somewhere [around] the 15th-largest farmers in America right now."
"We," as in, his hedge fund.
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 Financial Times 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.
Even Michael Burry, the now-defunct Scion Capital founder and star protagonist of Michael Lewis' The Big Short-who bet against the housing bubble in 2008 with credit default swaps to enormous profit-gave a rare interview on Bloomberg TV last year, explaining that he's thrown his hat into "productive agriculture land with water on site" as it's going to be "very valuable in the future." (Like most of those asked to comment for this story to The Observer, Burry declined to discuss his investments in farmland.)
Three years later, the purchase of farmland both in America and abroad by outside investors has increased-so much so that in February, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned against the violent possibilities of a farmland bubble, telling the Senate Agriculture Committee that "distortions in financial markets" will catch the U.S. by surprise again. He would know, because he's seeing it in his backyard: Kansas and Nebraska reported farmland prices 20 percent above the previous year's levels and are on pace to double values in four years. A study commissioned by the Organization for Economic Cooperation and Development and released in January estimated the amount of private capital currently committed to farmland and agricultural infrastructure at $14 billion. It also estimated that future investments will "dwarf" what's currently being thrown into land, by two to three times. Further down, the study makes a conservative projection that the amount of capital potentially entering the sector over the next decade will fly past $150 billion.
When asked if this is an end of the world scenario, the hedge-fund manager replied, “It really is. I tell my fiancée this from time to time, and I’ve stopped telling her this, because it’s not the most pleasant thought.’
This is happening in part because investors see their play as a hedge against hyperinflation. While the rest of the world uses the current calculation of the Consumer Price Index as a proxy for the cost of goods, some farmland investors are using a different equation, one from 1980. These investors assert inflation should be calculated the way it was before the Boskin Commission's 1996 reworking of the CPI formula-in which case, it would be much, much higher.
"The CPI supposedly today is something like 1.5 percent," says the hedge fund manager. "We think the actual rate of inflation is something closer to 6 or 7 percent on an annual basis. It's also not about what it's been over the last 10 years; it's about what it's going to be over the next 10 years."