H a n c o c k A g r i c u l t u r a l I n v e s t m e n t G r o u p

Volume 19, Number 2Fall 2011

ith U.S. farmland values up an average of 6.4% per year over the past decade1 and some

regions of the country experiencing even more dramatic appreciation, analysts and investors

have raised valid questions about the sustainability of land prices and whether a farmland

“bubble”currently exists.Could surging demand for farmland investments be driving the asset

class to repeat the experience of the residential real estate bubble, which peaked in 2007 and

whose subsequent bursting figured prominently in the financial crisis of 2008? How similar is

the recent run-up in farmland values to that which occurred in the 1970s and ultimately led to

the 1980s farm crisis? This article explores the fundamental drivers of farmland values and

investment performance, assesses the economic health of the U.S.agricultural sector, and

discusses the potential existence of a “bubble” in U.S. farmland markets.

Based on a variety of evidence from global demand growth to balance sheet soundness,

the article concludes that fundamental factors currently support farmland values and the U.S.

farmland market does not appear to be experiencing such a bubble.While not immune to

certain downside risks, the near-term outlook for U.S. farmland remains positive.

W

Is There A

Farmland Bubble? . . . . . . . . 1

Williams Promoted to

President as Conrad

Retires; Reed Joins

Acquisitions Team . . . . . . . . 7

Contents

Continued on page 2

1 USDA

time lows and at less than half

of the peak levels reached

during the 1980s.

Lower Debt Relative to Other Asset ClassesAdditionally, relative to other

asset classes such as commer-

cial real estate, the U.S. farm

sector has maintained a lower

and more stable debt-to-

equity ratio in recent years as

shown in Figure 4, page 3. As

commercial real estate values

declined with the financial

crisis and recession of 2008,

debt ratios increased. Since

the farm sector did not expe-

rience a decline in property

values in 2008 and 2009 of

the magnitude experienced

by the commercial real

estate sector, its debt ratios

increased relatively modestly.

Interest Coverage Ratio AdequateFurther evidence that

current debt levels are not

excessive and that farmland

An economic bubble is an

unsustainable deviation in

the price of an asset over its

intrinsic value, often associ-

ated with a rapid accumulation

of leverage.2 One key aspect

of recent farmland price

increases is that they have

occurred without the accu-

mulation of significant

additional leverage and, rela-

tive to growth in assets and

equity, expansion of farm

sector leverage has been mod-

erate, as shown in Figure 1.

Balance Sheet Remains StrongIn real terms, as shown in

Figure 2, current farm sector

2

Is There A Farmland Bubble? Continued from page 1

Source: USDA ERS

Figure 2: U.S. Farm Sector Balance Sheet (real basis): 1970-2011 (F)

debt also appears modest and

the balance sheet healthier

than in the scenario that trig-

gered the 1980s farm crisis.

While 2011 asset and equity

levels are close to the levels

seen at the prior peak in

1980, 2011 total farm sector

debt in real terms represents

only 63% of the 1981 peak

debt level.Total farm sector

debt is forecast to decline

in 2011 in both real and

nominal terms.The USDA

forecasts real estate debt to

decline and non-real estate

debt to increase modestly,

reflecting increased invest-

ment in capital equipment.3

Debt Ratios Remain LowThe fact that the rapid rise

in U.S. farmland values is

unmatched by an equally

steep rise in aggregate debt

over the past several years is

also illustrated by sector debt-

to-equity and debt-to asset

ratios.As shown in Figure 3,

both measures stand near all-

Figure 1: U.S. Farm Sector Balance Sheet (nominal basis): 1970-2011(F)

Source: USDA ERS

“While not immune

to certain downside

risks, the near-term

outlook for U.S.

farmland remains

positive.”

Figure 3: U.S. Farm Sector Debt Ratios: 1970-2011(F)

Source: USDA ERS

2 HAIG3 Federal Reserve Bank of Kansas City, Agricultural Credit Conditions, Second Quarter 2011.

3

Figure 4: U.S. Farmland vs. Commercial Real Estate Leverage: 4Q'02-2Q'11 Figure 5: U.S. Aggregate Farm Interest and Interest Coverage (nominal basis): 1970-2011 F

Figure 6: U.S. Aggregate Farm Interest and Interest Coverage(real basis): 1970-2011 F

values are not in bubble

territory can been seen by

analyzing the farm sector’s

aggregate interest level and

interest coverage ratio.4

On a nominal basis, as

shown in Figure 5, aggregate

interest paid by the sector

has increased since 2004,

but the interest coverage

ratio,which peaked in 2004,

remains well above both the

30- and 40-year averages.

Interest coverage has

trended upward since the

1980s, as net farm income

has increased faster than

debt in both real and

nominal terms.

On a real basis, aggregate

interest levels appear even

more modest relative to

those of the 1970s and

1980s (Figure 6).

Midwest CapitalizationRates Flat to TrendingUpwardFarmland values in the

Midwestern Corn Belt have

increased at a higher annual

rate than the national aver-

age over the past several

years, according to the

National Council of Real

Estate Investment Fiduciaries

(NCREIF) Farmland Index,

which measures performance

of large pools of institutional

investment in farmland.

NCREIF Corn Belt sub index

values have appreciated an

average of 9.3% per year over

the past 10 years and an

average of 6.8% per year over

the past 15 years, compared

to appreciation rates of 6.1%

and 4.5%, respectively, for the

total NCREIF Farmland Index.5

Even as property values have

appreciated significantly,

income returns in the Corn

Belt have held relatively

steady, with increases in

recent years (Figure 7).

Source: USDA

Is There A Farmland Bubble? Continued from page 2

Figure 7: NCREIF Corn Belt Annual Income Return: 2001-2010

Source: NCREIF

Source: NCREIF OEDCE Index, USDA Source: USDA

4 Aggregate interest includes real estate and non-real estate interest. Interest coverage ratio equals netincome divided by interest.

5 Source: NCREIF All Farmland Properties Detailed Quarterly Performance Report, Second Quarter 2011.

Is There A Farmland Bubble? Continued from page 3

The fact that income return

rates in the Corn Belt region

have kept pace with recent

appreciation mitigates con-

cerns that this level of

appreciation could signal a

farmland bubble. As illustrated

in Figure 8, rates of income

return to institutional

investors in the Corn Belt

have risen in recent periods,

while overall appreciation

rates have moderated.

Exports and Net FarmIncome SustainableOverall, the U.S. farm sector

continues to generate strong

income, driven in large part

by expanding U.S. exports of

agricultural commodities as

well as higher value products.

Net farm income has grown at

an annualized rate of 5% since

1970 and in 2011 is forecast

to reach $104 billion (Figure

9). U.S. agricultural exports

are projected to reach $137

billion in 2011 (Figure 10).

China’s Key RoleChina has played an increas-

ingly important role in U.S.

agricultural export growth

over the past decade as

shown in Figure 10. An

expanding middle class, cou-

pled with changing dietary

preferences, is driving

demand for U.S. agricultural

products from soybeans to

tree nuts.This demand repre-

sents a structural shift in

global consumption.

Since 2010, China has been

the top destination for U.S.

agricultural products. China’s

15% share of total U.S. agricul-

tural exports now exceeds

that of both Canada and

Mexico. U.S. agricultural

exports to China have

increased from $1.7 billion

in 2000 to $17.5 billion in

2010 and are projected to

reach $21 billion in 2011.

Corn Exports to China SurgeChina has long been a buyer

of U.S. soybeans, buying about

a quarter of the U.S. crop,6

but in recent years, the nation

has moved from being a net

exporter of corn to importing

significant amounts of U.S.

corn. Between 2007 and

2009, exports of U.S. corn

to China increased 170% by

volume, from 2.16 to 5.84

million bushels, and then

from 2009 to 2010, U.S. corn

exports to China surged

another 881% to 57.28

million bushels.

As the Chinese demand

more meat protein in their

diets, demand for grain is

expected to continue to

increase. Production of pork,

chicken and beef requires

Figure 8: NCREIF Corn Belt Income and Appreciation Performance forselected periods 2004-2011

Figure 9: U.S. Net Farm Income: 1970-2011(F)

Source: USDA

“China has played an

increasingly important

role in U.S. agricultural

export growth over

the past decade.”

Source: NCREIF Corn Belt Returns 1/1/04-6/30/11

Figure 10: Agricultural Exports and Principal Trading Partners: 2000-2011(F)

6 Source: http://www.ers.usda.gov/Data/FATUS/

Source: USDA

4

value and specialty exports

to China have also increased

by large percentages over

the past 10 years, though

from a much smaller base

(Figure 12). Expansion of

the Chinese middle class has

boosted demand for higher-

value food products such as

snack foods and wine. Nut

consumption has risen

rapidly. The health benefits

of consuming nuts are

increasingly recognized:

what was once seen as a

luxury item is now entering

the mainstream of consumer

purchases both as an individ-

ual product and as an input

into processed products such

number could increase

with anticipated increases

in China’s feed grain needs

to support increased meat

consumption.

Expanding Nut Crop PurchasesWhile bulk commodity

grains and oilseeds dominate

China’s purchase of U.S.

agricultural products, higher

5

several pounds of grain to

produce each pound of

meat. Corn is also used in

food sweeteners and

starches. Figure 11 shows

increases in value of corn

and soybean exports to

China over time, reflecting

both volume and price

increases over the period.

In 2011, the pace of export

activity to China continued

to quicken. In July, China

ordered 21 million bushels

of U.S. corn in one purchase,

followed by another 2.2 mil-

lion bushels in early August,

dwarfing total annual pur-

chases of recent years.7 The

USDA forecasts that China

will import 79 million

bushels from all sources in

the 2011/2012 crop year.

In subsequent years, this

“Expansion of the

Chinese middle class

has boosted demand

for higher-value food

products such as

snack foods and wine.”

Figure 11: U.S. Corn and Soybean Exports to China, by value: 2001-2010 Figure 12: U.S. Agricultural Exports to China 2001-2010

7 Source: USDA /FAS/Export Sales Reporting

Source: U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Statistics Source: U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Statistics

Is There A Farmland Bubble? Continued from page 4

products.While China domi-

nates the increases shown

in Figure 14, with a nine-fold

increase over the past 10

years, the value of U.S. agri-

cultural exports to South

Korea, the Association of

Southeast Asian Nations

(ASEAN)8 countries and India

has more than doubled

during this timeframe.

as snack foods, baked goods

and candies.

U.S. pistachio exports to

China have grown from

zero in 2002 to 53.1 million

pounds in 2010. Almond

exports fluctuated from 27.8

million pounds in 2003 to

16.7 million pounds in 2006

before soaring to 133.0 mil-

lion pounds in 2010 (Figure

13).As the U.S. has produced

ever-larger almond and pista-

chio crops over the past

several years, growth in both

export and domestic markets

has absorbed these produc-

tion increases, maintaining

strong income for producers

and supporting land values.

Other Emerging Marketsalso Boost Exports, NetFarm IncomeIn addition to China, other

emerging market countries

are also increasing their

imports of U.S. agricultural

Is There A Farmland Bubble? Continued from page 5

6

Figure 13: U.S. Nut Exports to China, by volume: 2001-2010 Figure 14: Total U.S. Agricultural Exports to Asia: 2001-2010

Source: California Almond Board, Administrative Committee for Pistachios.

“Expectations for

strong net farm

income continue, led

by surging export

demand, particularly

from China and other

developing nations.”

8 ASEAN member states include: BruneiDarussalam, Cambodia, Indonesia, Laos,Malaysia, Myanmar, Philippines, Singapore,Thailand and Viet Nam.

Source: USDA

7

Fundamentals SupportContinued Growth, Refute Suggestions ofFarmland “Bubble”In summary, U.S. farmland

values are well supported by

the sector’s strong balance

sheet, with modest and

decreasing debt levels. Overall,

and even in the areas of most

rapid appreciation, current

earnings are supporting land

values. Expectations for strong

net farm income continue, led

by surging export demand,

particularly from China and

other developing nations.

Under Mr. Conrad’s leader-

ship, HAIG became the first

U.S.-based institutional farm-

land manager to offer clients

international investment

options. He was also instru-

mental in the development of

the National Council of Real

Estate Investment Fiduciaries

(NCREIF) Farmland Index and

in promoting awareness of the

asset class within the institu-

tional investment community.

With Mr. Conrad’s retire-

ment, HAIG director of asset

management, Oliver

Williams, has been appointed

president. Prior to joining

HAIG in 1997, Mr.Williams

spent five years with the

First Pioneer Farm Credit,

ACA, one of the largest farm

credit associations in the

country. He is a member

of the American Society of

Farm Managers and Rural

Appraisers, the Association

for Investment Management

and Research and the Boston

Security Analysts Society.

He is a CFA charterholder

and earned a B.S. in

Agricultural Economics,

with a concentration in

finance, from Cornell

University. He grew up on

a poultry and grain farm

in western New York.

Hancock Natural Resource

Group Chief Executive Officer

Dan Christensen commented

on the leadership transition,

“We wish Jeff all the best in

his future endeavors and

thank him for his many years

But the Future Rests on Sustainability of Key Factors The continued health of the

sector, however, rests on the

sustainability of key factors

such as commodity prices,

farm-level expenses, the rela-

tive strength of the U.S. dollar,

and the level of interest rates.

Farmland values remain sensi-

tive to declines in net farm

income that could result from

decreasing commodity prices

and/or increasing farm-level

expenses such as increasing

costs for fuel and other

inputs.A strengthening U.S.

dollar could also negatively

affect foreign demand for U.S.

agricultural products, while

increasing interest rates could

put pressure on earnings.

None of these risks appears

likely in the near term, but

these factors merit continued

monitoring.

Today, with financial mar-

kets experiencing extreme

levels of volatility and global

demand for agricultural com-

modities surging, increasing

demand for farmland invest-

ments may also contribute to

land value increases. Investors

should not lose sight of the

fundamentals driving invest-

ment performance as they

evaluate farmland

investments.

Sources:

All charts and data were compiled from thefollowing data sources:

• United States Department of Agriculture,Economic Research Service

• United States Department of Agriculture,Foreign Agriculture Service

• United States Department of Agriculture, GlobalAgricultural Trade System (GATS)

• United Nations, Food and AgricultureOrganization Statistics (FAOSTAT)

• Federal Reserve Bank of Kansas City

• California Almond Board

• U.S. Administrative Committee on Pistachios

Is There A Farmland Bubble? Continued from page 6

Continued on page 8

fter 21 years with the Hancock Agricultural Investment

Group (HAIG) and 24 years with John Hancock, HAIG presi-

dent Jeffrey Conrad has retired.Mr.Conrad developed HAIG’s

farmland investment business from an offshoot of the parent

company’s lending business to one of the largest institutional

managers of agricultural real estate in the U.S.

Oliver Williams Brent Reed

A

Williams Promoted to President as Conrad Retires;Reed Joins Acquisitions Team

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For further information on any of thetopics covered in Farmland Investor, contactStephen A. Kenney, HAIG Vice President –Business Development at (617) 747-1620 or visit our web site at www.haig.com.

Disclaimers and Note on Forward Looking StatementsFarmland Investor is published by HancockAgricultural Investment Group, a division of Hancock Natural Resource Group, Inc.headquartered in Boston, MA. HancockNatural Resource Group, Inc. is a registered investment adviser and wholly-owned, indirect subsidiary of

Manulife Financial Corporation of Toronto,Canada. The information provided herein isnot an offer to sell, or a solicitation of anoffer to buy any security, investment product or service. This material was prepared solely for informational purposesand it is distributed with the understanding

that Hancock Agricultural InvestmentGroup is not rendering legal, accounting or other professional services. There is noguarantee that forecasts discussed will be realized. A variety of factors, many ofwhich are beyond Hancock AgriculturalInvestment Group's control, may affect

performance and results, and could causethe actual performance and results ofinvestments to be materially different fromany future performance or results that maybe expressed or implied by any forward-looking statements.

of leadership at HAIG. Oliver

inherits a very solid manage-

ment team.We are confident

that Oliver and his team,

together with our farmland

property managers, will con-

tinue to generate excellent

farmland investment results

for our clients.”

Reed Joins TeamIn addition, Brent Reed has

joined HAIG as West Coast

acquisitions manager. Mr.

Reed is responsible for

sourcing farmland, vineyards

and orchards throughout

California and the West Coast.

Mr. Reed, who brings more

than 20 years of experience

in agricultural investments,

previously was vice president

and senior relationship man-

ager for agribusiness lender,

Rabo AgriFinance and he

was an investment manager

for MetLife Agricultural

Investments. Mr. Reed gradu-

ated from California State

University at Fresno with a

B.S. in Agricultural Business.

He is a member of the

American Society of Farm

Managers and Rural

Appraisers and a past board

member/treasurer of the Ag

Lenders Society of California.

He grew up on a farm near

Porterville, California and

resides on a small tree fruit

ranch in Tulare County,

California.

Williams Promoted to President as Conrad Retires; Reed Joins Acquisitions Team Continued from page 7

“We are confident that Oliver and his team,

together with our farmland property

managers, will continue to generate excellent

farmland investment results for our clients.”

Dan Christensen, Chief Executive Officer, HNRG