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UK Farmland Price Up 12 Per Cent

UK Farmland Price Up 12 Per Cent

24 August 2011

UK - Talk about rich soil. The average price of UK farmland was 12 per cent higher in the first half of 2011 than a year earlier, according to the Royal Institution of Chartered Surveyors.

The yield is down to 1.8 per cent. Prices may rise more slowly this year, but it has been quite a run. Data from property services provider Knight Frank show a 15 per cent annual rate of increase over the past eight years – 12 percentage points faster than British retail inflation. What has happened?

According the the Financial Times, regulation, a more favourable set of European Union agricultural subsidies in 2003, is a factor. But most of the upward pressure is financial.

First, agricultural commodity prices have decoupled from production costs. Wheat, the largest crop in the UK, has doubled. Rising demand from emerging markets explains some of that, but an ample supply of cheap money was required to make the small shortage to be so lucrative for farm owners.

Second, those made wealthy by the British financial industry have spread some of their affluence into the countryside. Bankers’ dabbling with rural life makes more money-oriented growers uncomfortable, but the latter continue to bid. They are often looking for land that will stay in the family for generations. Finally and more recently, the Bank of England’s negative real interest rates make all tangible assets (almost nothing is more solid and scarce than land) cheap to finance and attractive. After all, this asset lasts forever (like gold) and offers some yield (better than gold).

The price of financialised assets, as British farmland has become, can keep rising as long as markets and moods stay propitious. But the returns on any essentially financial investment are much less predictable than agricultural yields. A down-to-earth analysis suggests that as an investment, the soil in Britain is more vulnerable than safe.

TheCropSite News Desk

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