By Igor Zhitnitsky and Victor German
NEW YORK ( TheStreet) -- Over the last several years, U.S. farmland prices have seen astounding gains, outperforming most other asset classes by a lot and leading some to speculate that farmland is the latest in a series of asset bubbles set to burst.
But while the run-up in agricultural land is cooling off for the moment and the market may be ripe for a temporary pullback, the overall trend is fundamentally positive. Here are four reasons the long-term outlook for U.S. agricultural land is strong:
Foreign demand for meat: The rapidly expanding middle class of the developing world has a growing appetite for meat. While China has been able to meet its own demand, its grain production capacity is inadequate to feed its livestock, which cannot be sustained on grazing alone. Per-acre grain productivity is much lower in China than in the West, and so the country has turned to the U.S. and other large producers for feed grains.This foreign appetite has led to a sharp increase in demand for corn and soybean-producing land in the U.S., and that pressure will only increase as the Chinese and other developing world consumers continue to increase their meat consumption. That points to the increasing importance of agricultural land. Historically low grain supplies: The 2012 drought showed that supplies of corn and other grains are unusually low. Average stocks-to-use ratios -- an industry standard for measuring the amount of supply cushion available to the market -- is historically low and has been trending down over the decade. That indicates that growth in demand is generally outpacing supply, and price shocks like last year's will likely become more commonplace. Historically low debt levels: During the 1980s, when farmland did go boom and then bust, the market saw high levels of debt. Farmers racked up loans and rushed to buy out their neighbors' properties before prices went any higher, leading to a crash in land values when grain prices faltered. In this decade, however, farmers' debt levels are very low and stable. In addition, agricultural lending institutions and Farmer Mac (AGM) have heeded lessons learned from the 2008 credit crisis and kept lending practices on the conservative side.
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