Posts Tagged ‘investment’
“Where grows?–where grows it not? If vain our toil, / We ought to blame the culture, not the soil.”*…
Even as agricultural land is becoming a coveted investment (as manifest in the purchases of billionaires like Stan Kroenke, Bill Gates, and Jeff Bezos, and by institutions like Nuveen and the Canadian Pension Investment Board and by publicly-traded REITs like Farmland Partners and Gladstone Land Corp), there’s another class of investor– with a very different use case– on the hunt. Joy Shin and Ryan Duffy report…
Last year, a datacenter developer started working the phones along Green Hill Road in Silver Spring Township, PA, outside Harrisburg. Mervin Raudabaugh got the call: a mystery buyer wanted to buy his 261 acres of farmland. The developer offered him $60,000 an acre for the land the 86-year-old had farmed for six decades. Mervin turned it down, selling to Lancaster Farmland Trust for <$2M instead, thereby locking the soil into agricultural use. “I was not interested in destroying my farms,” he told a local Fox affiliate.
Two things about this story might have been unthinkable a generation ago: that anyone would offer a farmer nearly $16M for that land, and that it’d be worth more dead (paved over) than alive (producing food).
The Supermarket of the World
For the better part of a century, that’s what America was. From 1959 through 2018, the country ran an agricultural trade surplus every single year, peaking near $27B in 1981, when soybeans, corn, wheat, and rice flowed out of the heartland in volumes that functioned as soft power and hard trade leverage. (When the Soviet harvest failed in 1963, Khrushchev had to buy American wheat through private US grain companies: at market rate, without credit, shipped on American vessels, which was a humiliation leveraged by his enemies to oust him the following year.)
Then, in 2019, the curves crossed. The U.S. has since run a deficit in four of the last six fiscal years. Last year, we imported $43.7B more in agricultural products than we sold.
Washington has started saying the right words. Last month, the USDA and Department of War signed a memorandum designating agriculture as a national security priority. Multiple bills linking food security to national security percolated through the last Congress. If you talk to the right folks in Washington, you’ll hear agriculture now being discussed the way semiconductors were in 2021 — as a sovereign capacity that a serious country cannot offshore.
All of which sounds right, none of which changes what is happening on the ground. Because the ground is the problem.
In real estate, you think in square feet, in proximity, in comps. Farmland trades in acreage, water tables, growing seasons, and soil composition. And right now, profitably farming that acre is just about the hardest it’s ever been.
Since 2020, seed costs have climbed 18%, fertilizer 37%, fuel 32%, and interest on operating loans 73%. Labor is up 50%. These costs never came back down after the 2021-22 supply chain shock, but crop prices did, creating a double squeeze on farmers. Farmland has appreciated nearly four-fold from ~$1,090/acre in 2000 to $4,170 in 2024.
Some 40% of U.S. farmers are over 65. The American Farmland Trust estimates nearly 300M acres will change hands through inheritance in the next two decades. When it does, the math facing each heir will look a lot like Mervin’s. What would you do: keep farming a business with collapsing margins, or if one was offered, take the check?
A Collision of Old & New Economies
Datacenters, chip fabs, and other megaprojects need what farms need: flat land, abundant water, reliable power, and access to transport.
In Loudoun County, VA, ground zero of America’s datacenter buildout, farmland already lists at $55,000–$79,000/acre, a significant premium over the statewide average because markets are pricing in the possibility the land will convert from farmland to computerland.
Conversions are large and getting larger. Meta’s $10B compute cluster in Richland Parish, Louisiana, sits on 2,250 acres of former soybean fields. Samsung’s new $17B fab occupies 1,200 acres outside Taylor, Texas, a town that once called itself the largest inland cotton market in the world. Micron’s $100B megafab is going up on 1,400 acres of former agricultural land and wetlands in Clay, New York. These are some of the largest private investments in American history, and among the most economically and strategically consequential bets we’re making as a country. You can’t help but notice the symbolism of it all: each is being built on rural land that was growing something one or two generations ago.
Datacenter developers, who already need some PR help, have seen local opposition to these projects emerge as a real planning risk, with farming families showing up at county meetings to argue that once the land converts, it will never come back.
Nobody should pretend this is irrational. A fab generates more economic value per acre than any soybean field ever will, the jobs pay better, and the strategic logic of onshoring chips is sound. But the math that makes each individual conversion obvious is the same math that, in the aggregate, leaves you structurally short on food. The country is losing about 2,000 acres a day, with 18M more projected to convert by 2040.
The Flow of Capital
As Washington works to subsidize the farming, to the tune of $10–$15B in federal support each year, Wall Street is betting on the land underneath it leaving farming.
Nuveen Natural Capital, a subsidiary of TIAA, manages $13.1B in farmland across 3M acres globally and recently launched a REIT targeting $3B in new capital. Those holdings have appreciated far beyond what crop income would justify, because it follows the pattern of a conversion optionality play: buy well-located agricultural land at agricultural tax rates and wait for rezoning.
Nearly 95% of American farms are still family-run, but most are modest operations. The 6% of farms generating $1M+ in sales produce 78% of everything, up from 69% just five years ago. Farming has developed the power-law distribution of a winner-take-most industry, except the winners don’t get to set their own prices. The family farm persists in name, but the economics (and economies of scale) increasingly push it to operate like a corporation or exit.
And institutional investors have some strange bedfellows on their side of the orderbook. Foreign investors held an interest in nearly 46M acres as of 2023 – 3.6% of all privately held farmland – up 85% since 2010. Canada alone holds 15M acres. China, which cannot feed its population from its own soil, built COFCO International into a state-backed grain trader that does $38.5B a year and accumulated millions of acres globally. Saudi Arabia was pumping Arizona’s groundwater through Fondomonte, a state-linked operation growing alfalfa for export, until Arizona killed the leases in 2023. Those countries treat productive soil as something worth a sovereign premium, and something you want to physically control…
[The authors recount the history of “Agro-Doomerism” and consider the (largely technological) potential solutions to the conundrum: “This is a hard problem, but it is a solvable one, as shown by the long history of technological revolutions in agriculture. Today, a set of technologies that were each too expensive or immature a decade ago have converged to the point where the raw inputs for a farm, ex land, can get radically cheaper, all at once.” They enumerate some of those potential saviors, and conclude…}
… The long arc of agro-doomerism and technological revolutions say there’s reasons for optimism. Many times before, the “math” said we’d run out of food; many times before, new science, systems, and processes came along that changed the denominator and proved the doomers wrong. Hoping and praying for AGI or another Norman Borlaug [the father of the Green Revolution] to save our bacon is not a strategy, but abundance-oriented technology stacks that don’t force a zero-sum choice between preservation and productivity might be. We should look at systems that help unfallow and uplift acres, making farmland competitive enough that we don’t pave over too much and one day realize we want the topsoil back – or our ag trade deficit erased.
The bet worth making is 1) to never bet against America, of course, and 2) that something similar will happen here: that productivity, not preservation alone, will close the gap. This is a generational opportunity, a category deeply in the national interest, and a sector wanting more capital, technology, engineers, and founders to show up. Those who get there first will be serving a gigantic market, and attacking a problem that Washington has acknowledged is existential but has no idea how to productively solve.
The supermarket of the world was built on cheap land and cheap water. Neither are cheap anymore, and both are being bid up by us – via population growth – as well as the industrial renaissance that we care so deeply about. But that doesn’t mean we can forget foundational inputs – literally – to our way of life…
Farming vs. fabs (and data centers)… American agriculture is caught in a collision between old and new economies: “The Supermarket of the World.”
* Alexander Pope
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As we contemplate cultivation, we might note that this, the third week in March, is National Agriculture Week.
“What is really amazing, and frustrating, is mankind’s habit of refusing to see the obvious and inevitable until it is there, and then muttering about unforeseen catastrophes”*…
One of the effectively-secret ingredients in the world’s economic growth over the last couple of centuries has been insurance. The ability to insure against catastrophic loss has underwritten (pun intended) the trillions and trillions of dollars of loans that have funded the construction and acquisition that has enabled the growth of both commercial endeavor and the the accumulation of personal wealth (directly through home ownership and indirectly through equity ownership in those commercial endeavors or participation in pension schemes that own that equity).
But in a way that was enitrely predictable, climate change is rendering a growing portion of the world uninsurable. Gavin Evans ponders what that might mean…
The Florida peninsula looks like a sore thumb. It juts into the Gulf of Mexico and the Atlantic, where the water is getting warmer year on year, prompting fiercer hurricanes that can blow down houses like collapsing decks of cards. Climate scientists are convinced all hell will break loose sooner or later when a monster-sized, property-destroying storm makes a direct hit on Miami or Tampa-St Petersburg. Given three near-misses in the recent past, the experts view such a calamity as inevitable. It’s a huge risk for anyone living there – they stand to lose everything – but also for those bearing the financial side of this risk, the insurance companies. Some in the industry are seeing this as a portent for their future – an impending existential threat with profound implications for the economic system.
There are no easy solutions for people still paying off mortgages and those who want to buy property along the Florida coast, because the potential payout on the back of a mammoth storm is so high that the reinsurers (who insure the insurers against catastrophe) are refusing to underwrite their clients and, with no reinsurance, there’s no insurance; and with no insurance, no mortgages; and with no mortgages, no property market. Insurance protects investments against loss and is therefore a pillar of the economic system. If it goes, economies are destabilised.
Many panicked homeowners have rushed to make their houses less risky for insurance companies by reinforcing their roofs with hurricane clips, installing impact-resistant windows, doors and shutters, and strengthening their foundations. But it’s not just storms and higher, warmer seas that concern insurers. Rising temperatures mean that the frequency, range and ferocity of wildfires are also on the rise.
So far this year, 3,374 wildfires have burned an area of Florida totalling 231,172 acres (at the time of writing), and it is even worse in California where 7,855 blazes have killed at least 31 people, destroyed more than 17,000 houses and devoured 525,208 acres of land, at an estimated cost of more than $250 billion. Here, too, homeowners rushed to make their properties more palatable to cold-footed insurers – clearing their surroundings of anything flammable, covering yards with gravel, sheathing houses with fire-resistant stucco, and replacing wooden roofs with steel.
But, even for the most diligent, insurance companies have turned tail, dumping existing clients and abandoning fire-prone and storm-prone areas altogether. On the Californian fire front, 2024 was a turning point as several insurers ceased issuing new policies because of fire-associated risks, including the United States’ biggest property insurer, State Farm, which cancelled policies in parts of Los Angeles. It is all too easy to view this cynically, but it’s happening because property insurers have been reporting year-on-year losses from climate change-related payouts.
Insurance companies survive by making more money from covering risk than they lose from these risks, which is why they prefer clients less likely to claim (insofar as they can predict the risk involved) and require them to pay substantial excess to discourage claims. When payouts rise above the premium intake, insurance companies either hike up these premiums or withdraw. But when that risk is considered catastrophic, potentially affecting many thousands of clients, as with Floridian storms and Californian fires, it is the reinsurers who are the first to retreat because they will ultimately bear most of the cost.
Reinsurers aggregate payout patterns to establish the likelihood of having to make huge payouts from future natural catastrophes. They do this by gathering exposure data from existing insurers in a geographical area, and by examining catastrophe models (computer simulations that estimate potential losses from natural perils). When they put all this together with detailed analysis of conditions within the area, they come up with a figure for their total potential loss if a catastrophic event strikes.
This is why reinsurers focus so intensely on climate change. Take a glance at the websites of big ones like Swiss Re and Munich Re and you get a sense of how central this is to their calculations – a concern that has spread to property insurers who are starting to hire climate consultants. Even more than market volatility, climate is their biggest headache. ‘You won’t meet a single insurance or reinsurance CEO who doesn’t believe in climate change,’ the insurance investor and former Lombard Insurance CEO James Orford told me. ‘They see it in the numbers – a combination of more extreme, less predictable events, combined with big losses of sums insured. All the modelling suggests these are uninsurable risks.’…
[Evans recaps the history of insurance, starting in Genoa, in the mid-14th century, with the insuring of maritime expeditions; examines the current state of play; examines the efforts (and gauges the weaknesses) of state’s efforts to step up with coverage when insurers step away; then considers another role for states…]
If states do withdraw from insurance and reinsurance, some of the most lucrative areas of the US, Canada, Europe, Asia, Africa and Australia will be devastated: no mortgages and no banks, leading to more ghost towns and villages. ‘It ends with depopulation and abandonment,’ said Agarwala. ‘Climate change reduces the operating space for humanity.’ In the UK, rising sea levels and coastal erosion could literally reduce operating space, putting 200,000 British homes at risk by 2050. There’s no coastal-erosion insurance, which puts more burden on the state, mainly to pay for new defences, but also to help people move.
Governments can take action in other ways, by investing greater sums in risk-prevention and management. There are signs of this happening such as the ‘fire-hardening’ and storm-prevention efforts in Florida, and improved flood defences in the UK; meanwhile, the EU’s Recovery and Resilience Facility is being used in several countries to build and renovate operations centres to cope with wildfires, and to buy firefighting helicopters.
In future, it is likely that voters will demand that their state and national governments do far more, regardless of the cost. They will want tougher building codes, including limitations on building in risky areas; expensive fire-prevention and fire-fighting schemes; better flood and storm defences; improved early catastrophe management, involving relocating people from risky areas and, when disaster strikes, rapid life-saving interventions such as large-scale emergency evacuations. If the insurance industry is forced to retreat by the climate crisis, all of this infrastructural investment will require vast chunks of taxpayers’ money. It is hard to avoid the feeling that this is part of our destiny, and that the sore thumb of the Florida peninsula is pointing us to the future…
Whole regions of the world are now uninsurable, bringing radical uncertainty to the economy: “The insurance catastrophe,” from @aeon.co.
See also: “An Uninsurable Country” (a report form NRDC), “The Insurance Crisis Is So Desperate People Are Turning Socialist” (a gift article from Bloomberg), and “The Uninsurable Future: The Climate Threat to Property Insurance, and How to Stop It” (from Yale Law Review)
* Isaac Asimov
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As we cover up, we might send highly-charged birthday greetings to a man who made foundational contributions both to the detection of climatic conditions and to a technology that may help allieviate climate change: John Frederic Daniell was born on this date in 1790. Named the first professor of chemistry at the newly founded King’s College London in 1831, he was an avid meteorologist. He invented the dew-point hygrometer known by his name and a register pyrometer; in 1830 he erected a water-barometer in the hall of the Royal Society.
But Daniell is better remembered as a chemist (and physicist), especially for his invention of the Daniell cell, an element of an electric battery much better than voltaic cells, the standard before him. Indeed, the Daniell cell is the historical basis for the contemporary definition of the volt (the unit of electromotive force in the International System of Units). All advances in battery technology since then were “from” the base that Daniell laid.
“When these systems work well, they hide in plain sight”*…
Plumbing, like most bits of the infrastucture on which we depend, is ideally out of sight and out of mind. It’s usually only when it fails that we pay attention… and then, too late to preempt the damage done and the problem that we then have to fix.
Nobel laureate economist Paul Krugman turns to Nathan Tankus to discuss a wonky, but crucially-important, piece of financial infrastructure now being beset by the Trump administration…
Nathan Tankus has become an essential resource during these strange and scary times. My last chat with Nathan was about DOGE’s depredations at government agencies. This time I spoke with him about disruptions in financial markets.
I continue to be astonished at how important the “plumbing” of these markets — the stuff that makes them function, which we normally don’t even notice — becomes when everything falls apart. And economists in general don’t know that much about the plumbing, so we need help from people like Nathan who do.
One thing that struck me during the conversation was Nathan’s explanation of the partial easing of financial stress after the crazy tariffs announced April 2 were replaced by the equally crazy tariffs of April 9. He points out that while a serious analysis of the April 9 tariffs showed that they were as bad in their own way as the original tariffs, the narrative was that policy had eased. And markets, he insists (and I agree) are less information processors than conventional wisdom processors.
Much more in the interview…
Watch, listen, and/or read: “Liquidity, Volatility and Market Craziness: Paul Krugman Interviews Nathan Tankus Again.”
* Deb Chachra [and here], How Infrastructure Works
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As we batten down the hatches, we might recall that this date in 1970 inaugurated a celebration of the mother of all infrastructures: it was the first Earth Day. Initially suggested by John McConnell for March 21 (the Equinox in the Northern Hemisphere, a day of natural equipoise), Secretary General U Thant signed a UN Proclamation to that effect. But Earth Day as we know it was founded by U.S. Senator Gaylord Nelson (who was later awarded the Presidential Medal of Freedom Award for his work) as an environmental teach-in to be held on on this date. The first Earth Day had participants and celebrants in two thousand colleges and universities, roughly ten thousand primary and secondary schools, and hundreds of communities across the United States. Later that year, President Nixon signed the Environmental Protection Agency into being. Earth Day is now observed in 192 countries, coordinated by the nonprofit Earth Day Network, chaired by the first Earth Day 1970 organizer Denis Hayes– according to whom Earth Day is now “the largest secular holiday in the world, celebrated by more than a billion people every year.”
Earth Day Flag created by John McConnell (source)
“Private equity has absolutely no reason to exist. The private equity holder has all the upside and the banks all the downside.”*…
As private equity investors become much more active in the Global South, Farwa Sial adds local economies and their labor forces to the list of those shouldering the risks of falling into the hands of operators whose m. o. is “slash and burn” (or here). Her point of reference is, as you’ll see the U.K., where private equity has wreaked havoc with essential services. But she might well have cited examples from U.S. (e.g., healthcare [or here] or infrastructure [or here]…
The effectiveness of private equity has been a subject of ongoing debate in countries of the Global North. There is substantial evidence highlighting the extractive practices associated with private equity operations across Western nations. Examples include the decline of the British high street and the financial instability of local councils in the UK, particularly in the provision of child care. Similarly, in the United States, private equity has been linked to the attrition of an already fragile healthcare system. In France, Germany and the UK., its influence has contributed to the deterioration of care homes, raising significant concerns about its broader social and economic impact.
In a recent blog, Michael Roberts characterized private equity as “vampire capital“, encapsulating the widely recognized critique that private equity firms function through a rentier model. These firms are frequently associated with practices such as asset stripping, worker lay-offs, and opting for excess leverage that increases the debt burdens of their acquisitions, all while failing to provide compelling evidence of value creation. This perspective aligns closely with earlier criticisms of private equity. During the 2000s, private equity operations were similarly likened to a swarm of locusts, reflecting widespread disapproval of their extractive and often detrimental economic practices.
In summary, such analogies emphasize the aftermath of private equity operations, leaving behind “carcasses and barren landscapes.” Nevertheless, the evidence of a hollowed-out socio-economic landscape in the Global North has not deterred the international expansion of private equity into countries of the Global South. On the contrary, ongoing reports of American private equity capturing British markets have emerged in tandem with the globalization of Western private equity. In so-called “emerging markets,” this expansion manifests in various forms, including an enthusiasm for deploying “moral money” through international development initiatives.
This article examines the role of private equity in Global South countries, focusing on three key characteristics: the escalation of indebtedness, the weakening of public markets, and the public subsidy function of development finance in facilitating private equity investments…
Exporting pain: “Private Equity in the Global South: Locusts? Vampires? The contagion effect” by @farwasial in @DevEconNetwork.
* Nassim Nicholas Taleb
(Image above: source)
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As we muse on models of modernization, we might recall that on this date in 1995, the Japanese Nikkei index fell more than 1,000 points from 19,241 to 17,785 as traders panicked over the devastation of the Hanshin (or Kobe) Earthquake. In total, the Nikkei had fallen 7.6% since the earthquake on January 17th.
The decline was the leading trigger of the failure of the 232-year-old Barrings Bank. A young trader, Nick Leeson, had speculated on Japanese derivatives. By this date in 1995, Leeson had make big bets that the Nikkei would remain between 19,000 and 21,000. As the market sank Leeson added to his positions, eventually accumulating over 60,000 futures contracts. Within a month Leeson quit the bank and was on the run (eventually he was arrested and served 3 years in jail). The losses he accumulated took Barings down; it failed and was sold to ING for 1 pound on March 6th.
“We cannot reason ourselves out of our basic irrationality. All we can do is to learn the art of being irrational in a reasonable way.”*…
Classical economists posit that investment decisions are driven by rationality — a clear-eyed evaluation of risks and rewards… but then, meme stocks.
Kwabena Donkor, an assistant professor of marketing at Stanford Graduate School of Business has just unveiled some new research that suggests that identity distorts our financial choices, leading us to overvalue investments that reinforce our sense of self…
People don’t just invest with their wallets — they invest with their identity,” says Donkor, a faculty fellow at the Stanford Institute for Economic Policy Research.
In a novel field study involving soccer fans, Donkor and several colleagues uncover evidence of how identity can skew economic thinking. The researchers ran a series of experiments focused on fans who placed nearly 40,000 bets on English Premier League matches during the 2021-22 season. Participants — nearly 800 from Kenya and 1,600 from the United Kingdom — were given a budget and asked to place bets on upcoming matches. They received winnings based on the outcomes of randomly selected games.
Most of the participants were longtime supporters of a particular team. (Manchester United was their top favorite.) They were more optimistic about their favorite teams, betting 20% more on them. They rated their teams as having a 10% to 18% higher chance of victory than other teams, even when presented with forecasts from professional oddsmakers suggesting otherwise. These results persisted even after accounting for factors such as personal beliefs and appetite for risk.
The study also finds that participants placed a lower value on gains not aligned with their identity — what the researchers referred to as an “identity tax.” Fans effectively devalued these neutral bets by 17% to 27%. For poorly performing teams, this “tax” could soar as high as 47%, reflecting a strong emotional impulse to support their favorite team even when the odds were against it
The research, detailed in a paper cowritten with Lorenz Goette of the National University of Singapore, Maximilian Müller of the Toulouse School of Economics, Eugen Dimant of the University of Pennsylvania, and Michael Kurschilgen of UniDistance Suisse, shows that identity-driven preferences explain much of the gap in bettors’ behavior. Simulations showed that distorted beliefs due to identity account for as much as 44% of the difference in fans’ betting behavior. The remainder stemmed from preferences rooted in identity itself — people were willing to sacrifice potential gains to support options that aligned with who they are…
… The study’s findings have far-reaching implications for understanding economic behavior, particularly in areas like consumer finance, brand loyalty, and even political decision-making…
… the research hints at how consumers view different products. Items that align with a person’s identity are likely to be seen as complements rather than substitutes. For example, Donkor says a consumer who identifies strongly with sustainability might view eco-friendly products as essential enhancements to their lifestyle, even if they’re similar to comparable, less expensive goods.
Ultimately, these findings could improve our thinking about the biases that influence our financial lives. As the researchers point out, acknowledging the role of identity in decision-making is one key to designing better policies, creating more effective financial products, and ultimately improving individual welfare. “If we ignore identity,” Donkor concludes, “we miss the bigger picture in decision-making.”…
Understanding the choices that we, and those around us, make: “What Soccer Fans Can Teach Us About Making Irrational Decisions,” from @SIEPR.
* Aldous Huxley
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As we ponder the price (and as a reminder that there are other kinds of irrational decisions and that sometimes returns do matter to investors), we might recall that it was on this date in 2008 that Bernard “Bernie” Madoff was arrested and charged with defrauding investment clients of as much as $65 billion. A pioneer in electronic trading and chairman of the Nasdaq stock exchange in the early 1990s, he had turned to money management. By 2008, Madoff was running a huge and growing fund that promised its investors high and stable returns… the problem: it was a Ponzi scheme, the largest known Ponzi scheme in history.
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