PE Ratio of a Farm

Paul Kedrosky brought up the "Farm PE" with this link: Click Here.

I sent that to my farmer contact from Kansas and here is what he had to say:

"We sold/leased back some of our ground for a 5% lease to price yield. Unfortunately, the price kept increasing but rent has not, so far. Current cash yields in our area are less than 5% on average meaning P/Es are around 20. For the damn longest time I couldn't figure out why anyone would want to own farm-ground. Rents were pitifully low because incomes farmers could earn off the land were low or even negative. So good farm ground at even $400/acre didn't seem attractive because cash rent was only $20-25/acre. Remember this was during a period when nearly every other asset class outperformed farm RE. Now the tide has turned and that same ground is $800 and rents are $40/acre. Extremely low interest rates are powerfully pushing farm real estate higher. Recent comparable land that sold for $600 in mid-2007 has brought $800 in late 2008. Land prices have not been negatively affected by the financial crisis. "People are going to eat......probably" - Jim Rogers"

Reading that article also reminded me of this magazine from 2006 called "Trader." It had Eric Bolling on the cover. He is a report for Fox Business Chanel now. In the magazine he has some model wife and it estimated that he made $15 million per year trading natural gas. He called it playing at the "$1,000 table at the casino" because natural gas futures are traded in $1,000.

Then I thought how he probably lost his ass and now its the farmers that should be getting the models, though they probably aren't interested. According to my contact in Kansas, the money in farming isn't there just yet, but I believe it's coming in 2 ways: Increased profits to farms and decreased profits to everyone else.

The anecdote on farming also reinforces my view on what's going to happen with inflation and deflation. I believe that residential and commercial real estate will continue to decline. There is simply too much supply. I believe that stocks will continue to decline. They are not cheap by any fundamental measure and investors that own them will be forced to sell for various reasons. I believe that interest rates will rise, not because investors demand higher interest rates to offset inflation, but because investors demand higher interest rates to offset the increasing default risk. I believe food prices will be flat. The demand for food will decline as people become less wasteful because they have less money to waste. I can't tell you how much food I see wasted by corporations and wealthy people. I believe oil and natural gas prices will be flat too, if not down. The demand for energy by corporations has declined significantly and individuals watching their budgets are using less too.

However, the oil clock is ticking. In 3-5 years when we get through this mess oil prices will skyrocket, which will put the economy back in shambles and keep the S&P 500 on pace with the Nikkei for 2 lost decades in the stock market.

If that forecast comes true then there is no need to rush in to buy stocks. In fact, long term bonds (I prefer Telecom bonds) would be one of the best performing investments. Don't let yourself get influenced by all these irrational investors you see on TV. Remember, most of them have called this thing wrong the whole time. Have patience and invest accordingly.