Stagflation or Bust? Buy Farmland

The ol’ end of year outlook.  However the longer term trends really are the more important ones for longer term investors. Which we all are.  In June this past year, the following was published:

“Let’s talk about inflation. There are two types commonly spoken about and published:  headline inflation and core inflation.  Headline inflation includes goods and services that represent the total inflation in the economy.  For example, it includes the price of an Ipad, the cost vs quality of which has been falling over time, thus representing a fall in inflation for this product. It also includes food and energy costs, such as apples and electricity.

Then there is core inflation, which is what governments and market commentators prefer to use.  That is because it is less “volatile” they say, it theoretically provides a better measure because it excludes “volatile” components of inflation in the economy such as “food and energy”. Thus for forecasters and the elites that manage the economy [and any payment linked to RPI such as a pension] they say it is more “relevant”. 

Now if you are sitting at home and wondering which is the more relevant measure of inflation for you; what would you choose?  Headline inflation of course, after all, as one very wise person in Queens [USA] suggested, “I can’t eat an Ipad”. What concerns us is the day to day living, of which it is indisputable food and energy are critical cost factors.

And any person who shops, drives or gets cold will tell you, energy and food prices have soared.  That is why they have gone on a consumption strike that is hurting the retail sector everwhere. 

And it hasn’t really started yet.  The FAO reports that its global food price index has reached an all time high – a 39% price inflation year on year.  Its cereals index has inflated 71% year on year.  The list goes on and it is important reading. 

And it does not take much research to know that energy costs are going to increase dramatically.  It has been underpriced for decades and some catch-up is inevitable.  Indeed, for energy and food, many credible pundits are saying we have already passed the tipping point of continuous consumption growth in a finite world and it is all downhill from here [if you have to pay for it, that is, not if you produce it]. 

What will make it more difficult for the global baby boomers, is that just when their income becomes reliant on assets and income from those assets, rather than employment income, they are experiencing a period of stagflation – cost inflation whilst income and asset prices deflate.  And many won’t have allowed for it when calculating their savings for retirement because they have never experienced this high inflation for such a sustained period. 

This stagflation is likely to remain for a decade or more as internationally, over indebted people, companies and countries de-leverage and / or go broke.  The consequences of which is that as medical, food and energy costs soar, there are less and less in savings to meet those future expenses.  And generally speaking, people always underestimate their future requirements in any event.”

And I see no reason to change my outlook.  And I have been amongst good company.  PIMCO, the world’s largest money manager went short the long bond because they expected inflation to rise due to the massive printing of money around the world. The inflation outlook is usually priced into the long bond and therefore causes its value to fall. They then admitted their error and unwound their positions earlier this year, and just as well, for the USA bond market has had a huge rally.  Gold itself soared, as punters were waiting for inflation, but is now down 19% since the peak - 1% off a bear market. 

On CNBC an interview of Jim Rogers was also forecasting stagflation in October.

When I wrote that last May, the FAO price inflation data was shocking at 39%.  Here we are in December, and its Food Price Index stands at 215 (Nov) compared to 213 mom a year ago.  Slightly less than 1% inflation month on month.  However if you look at the average for the year, then the index is up 24% compared to the average for 2010.  

Also it is interesting to cross check data.  Food prices received by farmers in the USA, say, are on the whole higher year on year in December when looked at in individual categories.  The Farmers Price Received Index as at December 2011, have averaged 3.7% (simple) over the last 20 years for all products, but 15% year on year.  So if farmers are receiving more for their produce, then that must eventually flow into the cost of food as recorded in inflation.

All over the world central bankers and financial institutions are forecasting lower inflation next year.  And this is the conundrum for investors.  Because when global central banks print money (as the ECB, Fed Reserve and Bank of Japan are doing etc)  that money has to be going somewhere.  And where it usually goes is into an inflationary bubble.

We know it hasn't been going into loans for the masses, or small business who are having a credit crunch.  From the UK, to the USA, to Australia. This report in The Telegraph shows that M3 money supply is contracting in the EU. 

In the end I think all those great investment minds have got it wrong because of Quantitative Easing which is being used by central banks along the yield curve, and a flight from risk by global investors into the USA bond market.  So that instead of bonds spiking in price (losing value as their yields rise to reflect rising inflation), with government money buying up bonds (equivalent) at the three year for EU and long term for the USA, inflation expectations are no longer represented accurately, or is being subverted, in the bond market.  So investors into this market are investing into a manipulated market, manipulated by their own central banks.

On the ground, for the general population, consumption (food, health and energy) prices appear to be rising, whilst jobs are lost, fiscal austerity kicks in, assets prices continue to deflate, and interest rates on deposits is near zeor (negative in real terms).  Whether it is shares, gold, real estate or commodities.  And GDP is in basic contraction just about everywhere.

I see no reason to change my outlook.  How to invest into that outlook.  Buy a farm!!

This is how the USDA reports it:  "Between 1994 and 2004, real values increased between 2 and 4 percent annually, and in 2005 and 2006 increased by 16 percent and 10 percent respectively. Since then, real growth in farmland values has slowed, but is still increasing by 3 to 5 percent annually." Farmland prices since 1969 have achieved an all time high in 2011.  Reuters is reporting that in the 3rd quarter, farm values in the US surged to the highest levels in more than three decades. 

In the UK, farm land values have tripled in a decade, as reported by the Financial Times. 

So where is all that money going?  Where is the bubble?  Maybe it is in farmland.  Or maybe, they are investing because they know that food prices are going to continue to rise as the world meets the challenge I outlined in Peak Food.   That is, stagflation.  No growth, inflationary prices.