Correction to this article

WITH many financial assets in the doldrums and markets spooked by the twin spectres of economic weakness and rising inflation, is it time to head for the hills? Barton Biggs, an investment guru, famously suggested that those wishing to preserve their wealth in times of turmoil should consider buying an “unostentatious farm”. And rural land has long been seen as a good inflation hedge.

But now may not be the most opportune time for investors to swap their wingtips for wellies. After more than two decades in the mire, the value of farmland has soared over the past few years on the back of strong prices for agricultural commodities, low interest rates and urban sprawl. It has become so fashionable that some wonder if it is a bubble waiting to burst.

Bulls (of the figurative kind) point to the biofuels boom and strong demand from developing countries, particularly in Asia, as billions of new consumers adopt more protein-rich diets. This pushes up demand for crops and livestock: farm animals consume a lot of grain-based feed. Though food prices have fallen back lately, thanks to supply strengthening as more grain is planted as well as a general easing of commodity values, they remain high. Stocks of some crops are at their lowest level for many years.

To improve their food security, importing countries have been snatching up farmland overseas—a trend the United Nations' top agriculture official has likened to 19th-century colonialism. Hedge funds have become more active too, seeking agrarian alpha. And finance is flowing: a recent survey by the Federal Reserve found banks still willing to back agricultural investments in America, despite capital woes.

To some, farmland values have now reached scary levels. The average price of an acre in America has almost doubled since 2004. In Britain, the value went up by 25% in 2007 and by a staggering 47% year-on-year in the first half of 2008. Many poor countries have seen similarly dizzying increases.

Tobias Levkovich, an equity strategist with Citigroup, thinks investors have been seduced by the bulls' “everyone's got to eat” mantra and are ignoring the warning signs, just as they did with the housing market in 2005-06. In an uncomfortable echo of that boom-turned-bust, land prices in America have deviated dramatically from their long-term growth rate (see chart). In relation to farm cash flows, they are now much higher even that they were in the late 1970s, the last golden age for ploughmen. The ratio of prices to cash-rent rates—the farming equivalent of the price-earnings multiple on stockmarkets—looks frothy too. In farm-riddled Iowa, it is at an all-time high of 24.2 times rent, well above the previous record, set in 1981, according to Farmland Investor Letter, a periodical devoted to land-valuation trends.

None of this makes a crash inevitable. Many still believe that the commodities boom has fundamentally changed the economics of farming. But the recent cooling-off has sown doubt, and a sharp correction would hurt.

Some investors have borrowed heavily to bet on the bucolic—as have some farmers, whose loan-repayment rates are starting to slip, according to the Fed survey. Worryingly, property accounts for a very high share of total farming wealth: around 90% in America, compared with 20% for households—though of course a farm, unlike a house, is a producing asset.

This is of consequence to investors in the agribusiness firms that have ridden the crest of the commodities wave, such as Potash Corp, CF Industries and Mosaic. Their shares are either reasonably valued or horrendously expensive, depending on your view of the boom's sustainability. Their boosters point out that their shares have come off their highs in the past few months and now trade at a modest seven to 11 times earnings.

But that is no comfort if they turn out to be cyclical stocks, after all, and not the beneficiaries of a “new paradigm”, argues Mr Levkovich. Homebuilders were said to be good value in 2006 when they were trading on similar multiples, and look what happened to them.

Even taking into account their recent share-price falls, moreover, the “dotcorns” have gained more as a group in the past five years than internet stocks did in the giddy second half of the 1990s. So it is still a very long way down, should they really lose their footing. That, combined with the lofty price of pasture, offers plenty of food for thought.





Correction: In the initial version of this article, we said the ratio of prices to cash-rent rates in Iowa was approaching the 1979 high of 22 times rent. In fact it has exceeded that number, which was actually reached in 1981, and is now at 24.2 times rent. This article was corrected on August 27th 2008.