Market.view
An arable parable
Is farmland overvalued?
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 closing in on the 1979 high of 22 times rent, 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.
Aug. 24 (Bloomberg) -- Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions.
``The Fed listens to Wall Street and believes what it hears,'' Buiter said yesterday in a paper presented to the Fed's conference in Jackson Hole, Wyoming. ``This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.''
Fed Governor Frederic Mishkin said Buiter's paper fired ``a lot of unguided missiles,'' and former Vice Chairman Alan Blinder ``respectfully disagreed'' with his analysis of the central bank's crisis management. Bank of Israel Governor Stanley Fischer told the gathering a fire extinguisher might be needed to cool the dispute.
The Fed has provoked criticism from some officials in the U.S. and Europe by trying to end the yearlong credit crisis through an expansion of lending. The steepest interest-rate cuts in two decades risk stoking inflation, while the Fed has been too generous in aiding banks, said Buiter, 58, a founding member of the Bank of England's independent rate-setting board in 1997.
In addition to rescuing Bear Stearns Cos. from bankruptcy, the Fed created a program to swap Treasuries for mortgage bonds, opened up lending to Wall Street firms and reduced the premium for direct loans to commercial banks.
Mishkin lashed out against Buiter's assertion that the Fed's rate reductions may cause higher consumer prices.
`Very Helpful'
``I wish he had actually read some of the literature on optimal monetary policy, because it might have been very helpful in this context,'' said Mishkin, who collaborated with Bernanke on inflation research in the 1990s.
Mishkin, a leading advocate of the Fed's effort to sustain economic growth through rapid rate reductions, said research shows that ``what you need to do is act more aggressively.''
In reply, Buiter said the value of such a strategy ``is not at all obvious to me.''
Fischer, drawing laughter from the audience, held up a red fire extinguisher saying, ``I asked the organizers for some technical assistance in dealing with this discussion.''
While defending the Fed, Blinder said Buiter's papers ``often feature an alluring mix of brilliant insight and outrageous statements.'' The central bank's performance, though not flawless, has been ``pretty good'' given the magnitude of the crisis, he said.
European Central Bank President Jean-Claude Trichet also came to the Fed's defense, saying ``what has been done until now has been pretty well done under very difficult circumstances.''
`Market Correction'
After a year of instability, ``we are still in a market correction,'' Trichet said.
The Fed, unlike the ECB and Bank of England that are charged with containing inflation, has two mandates according to law: keep consumer prices in check and maximize employment.
The world's top central-banking officials and scholars at the conference indicated the yearlong credit crisis has yet to run its course, with continued turmoil in banking and housing, Fischer said yesterday in the event's closing remarks.
Bernanke, who didn't comment at the meeting after giving the opening speech, has argued that policy makers' actions were necessary to safeguard the economy from the impact of the credit crisis.
Buiter said the Fed's emergency lending programs are too generous. The U.S. central bank is making up to $200 billion of its Treasuries holdings available to primary securities dealers, and $150 billion of funds through auctions to commercial banks. In addition, banks are able to borrow directly from the Fed.
``You don't let your borrower determine the value of the collateral offered to you,'' Buiter said. ``That's just crazy.''
Too Sympathetic
Buiter also reiterated his argument that central banks can fall prey to ``regulatory capture'' by financial institutions, growing too sympathetic to their needs when setting rates.
Two economists echoed Buiter's concern in another paper presented yesterday, saying the Fed's program allowing institutions to swap Treasuries for mortgage bonds and other debt enables firms to ``window dress'' their balance sheets.
``Financial institutions can hold low-quality securities for the period where no reporting is required,'' wrote Franklin Allen of the University of Pennsylvania and the University of Frankfurt's Elena Carletti. ``Temporarily increasing the supply of Treasuries makes this kind of deception easier. It helps remove market and regulator discipline.''
The financial crisis is also forcing the ECB to rethink aspects of its money-market operations, which provide some flexibility compared with programs at the Fed and the Bank of England.
ECB Rules
The ECB plans to tighten collateral rules to head off the risk of abuse by some financial institutions, ECB council member Yves Mersch said in an interview yesterday.
Buiter nevertheless won some praise for openly confronting the Fed's record at its summer retreat in Grand Teton National Park.
``Willem's papers don't pull punches, they have attitude,'' Blinder said. ``You have to give credit to a guy with the nerve to come here with black bears on the outside and the FOMC on the inside and be this critical of the Federal Reserve.''
The FOMC refers to the central bank's rate-setting Federal Open Market Committee.
The coming days
The week ahead
Israel plans to release some 200 Palestinian prisoners, and other news
• THE Democratic Party begins its four-day national convention in Denver, Colorado, on Monday August 25th. Barack Obama, who will become the official nominee, will have his widely praised powers of speechmaking put to the test when he addresses a crowd of some 70,000 at a local stadium. A huge TV audience is expected to tune in, too. Mr Obama has failed to establish a lead in the polls over his ageing Republican rival, John McCain, although he remains the bookmakers' favourite to win. If he still lacks a lead in the polls after the convention, and after the announcement of Joe Biden as his running mate, doubts about the Democratic candidate's ability to appeal to ordinary voters may spread.
For background see article
• ISRAEL plans to release some 200 of the 11,000 Palestinians it is holding prisoner on Monday August 25th. The gesture is aimed at shoring up support for Mahmoud Abbas, president of the Palestinian Authority, who is engaged in peace talks with Israel. The planned gesture has angered some Israeli politicians who argue that this could hamper efforts to free Gilad Shalit, a soldier held captive by Hamas, a militant Islamist group which controls the Gaza Strip.
For background see article
• ANWAR IBRAHIM takes another step aimed at ousting Malaysia’s government on Tuesday August 26th when he contests a by-election in his northern home state of Penang. Elections in March saw a strong showing for the opposition party of Mr Anwar, a former deputy prime minister who was sacked in 1998 and jailed on sodomy and corruption charges. If he wins the by-election and returns to parliament, from which he had been banned as a result of his corruption conviction, he will be in a better position to inflict damage on the ruling party of the current prime minister, Abdullah Badawi.
For background see article
• THE effect of falling oil prices should be revealed in a preliminary “flash” estimate of euro-area inflation on Friday August 29th. The figure for August is expected to show that annual inflation is slowing as the price has declined. This could be good news for economic policymakers if it marks that the peak for inflation in rich-country economies is passed.
Georgia fails to escape its past
| By Ed Stourton BBC News, Tbilisi |
For the people of Georgia, any optimism about the future has been suddenly displaced by uncertainty and worries from the past, as its conflict with Russia ends in swift defeat and humiliation.
Grand buildings of the Soviet era do not decay with dignity; the cheap materials mean they just moulder.
 Stalin's hometown of Gori took a battering in the conflict |
The concrete walls of the former presidential palace which is Eduard Shevardnadze's Tbilisi home are streaked with water stains, the formal gardens as scruffy as the gaggle of soldiers guarding the gate.
He sits in a gloomy salon, surrounded by paintings in the socialist-realist style, and a wall full of photographs from his time as Soviet foreign minister, with Ronald Reagan, Margaret Thatcher, Helmut Kohl and all the other big-wigs of those heady days, when he helped manage an end to the Cold War.
He has slowed up with age, and remembering the twinkly energy which once made him such a star of summit doorsteps, I was saddened to find him so diminished.
The Georgian attitude to Mr Shevardnadze is ambiguous. They kicked him out of the presidency in a revolution, but he is their second most famous politician. And even our fiercely modern, young translator wanted a photograph with the man she called "grandpa".
Unfinished business
There is a similar ambiguity about the country's most famous politician.
Ask for a glass of the delicious Georgian spring water called Borjumi and you will be proudly told it was "Stalin's favourite drink".
A heroic statue of that murderous dictator still stands in his home town of Gori, which took such a battering in the recent conflict.
 Georgia's past has returned to haunt its present and its future. |
That conflict was a piece of unfinished business from the era which was book-ended by the careers of these two men.
Stalin designed the Caucasus in the messy way which has led to separatism.
And because the Soviet Empire collapsed with such speed and such minimal bloodshed - an achievement for which Mr Shevardnadze can certainly claim some credit - there was not time to tidy up the rough edges like South Ossetia.
My hotel bedroom looked out on a panorama of Tbilisi, and it struck me as a city running desperately to escape its past.
 |  The impact of the war is not always obvious in Tbilisi  |
It is cradled by mountains, divided by a swift green river and studded with the distinctive round-towered churches which have been built about the place with an almost promiscuous enthusiasm.
But it is the new build that stands out, the office blocks and government buildings and the well-paved roads, that were busy even when the Russians were a half-hour drive away.
And when you walk round the old quarter, you find many of the traditional town-houses, with their graceful wrought iron balconies, sinking into neglect.
Human misery
There is the same passion for modernity in the conversation of young Georgians.
A 24-year-old woman waxed indignant about what she rather charmingly called the "Institute of Virginity", by which she meant not some high-walled convent but Georgian society's straight-laced, sexual morality.
Young Georgians want to join the world of their contemporaries in the West - that is why Mr Saakashvili has been so popular - and they cannot quite believe they have been caught up in something as old-fashioned as a war with Russia.
 Georgian refugees find shelter in the capital Tbilisi |
A young man in our hotel lobby - heading back home to Gori - tried to cadge a lift off journalists.
He could not quite get his mind around the fact that what had been a routine journey had suddenly become so dangerous.
The veneer of modernity means the impact of the war is not always obvious in Tbilisi.
I saw no ragged and defeated soldiers on the streets, no columns of refugees. But scratch away at the surface and there is old-fashioned human misery.
We found 1,000 refugees who had taken over a former military hospital. It seemed to have been abandoned until their arrival, and walking the cold, echoing corridors with their peeling plaster it was easy to see why.
There was no water or sanitation, no food and nothing to cook on. Almost all of the people there were sleeping on concrete floors.
Most of them were Georgians from South Ossetia. The chances that they will see their villages there again are very slight indeed.
Becoming part of history
The violence of the conflict and Russia's subsequent statements on South Ossetia and the other breakaway area, Abkhazia, make the possibility that those regions will remain part of Georgia very remote, and none of these people will return to live under Russian influence.
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Instead they will keep their memories; memories, they said, of being bombed by Russian planes and watching their Ossetian neighbours loot their homes.
One woman described giving tea to Georgian troops in her kitchen as they advanced and then seeing the same soldiers retreat wounded and carrying their dead.
Another spoke of beheadings by South Ossetian irregulars.
Whether or not all these stories are true does not, in a way, matter. They are believed by the people who hear them, and they are becoming part of Georgia's history.
History is back in Georgia, the past that belongs to this country's most famous sons - Stalin and Shevardnadze - is coming alive again.
US warship reaches Georgian port
 The USS McFaul is the first of three ships to arrive in Georgia |
A US warship has arrived in the Georgian port of Batumi carrying the first delivery of aid supplies by sea.
Russian forces are still in control of the military port of Poti, to the north of Batumi, after Moscow withdrew most of its combat troops from the country.
French President Nicolas Sarkozy, who brokered the ceasefire, has urged Moscow to pull out those forces too, and called a summit of EU leaders.
Meanwhile, Georgia said a train full of fuel was blown up by a mine near Gori.
A huge plume of black smoke could be seen across the area and witnesses said the force of the blast had forced some of the train's wagons off the tracks.
Interior ministry spokesman Shota Utiashvili said there had been several explosions near an abandoned Georgian military base where the Russian troops, on leaving Gori, had left a stockpile of munitions taken from the Georgian army.
Black smoke and flames rise from the train
He suggested the stockpile or the train track could have been mined by the Russian forces. He said there had been no casualties.
Georgian authorities had been hoping to help thousands of refugees return to Gori on Sunday having carried out a mine-sweeping operation in the town, which lies close to the border with the breakaway province of South Ossetia.
Georgia's Prime Minister Lado Gurgenidze said it would be important to see the extent of the damage, once the fire had been extinguished.
"The railway is vital, not just for the Georgian economy but for the economies of neighbouring countries," he said.
The track runs through the capital Tbilisi before splitting and running to the Black Sea ports of Poti and Batumi and south-west towards the Turkish border.
One of the train's wagons was marked Azpetrol - a company based in Baku, Azerbaijan.
Displaced
President Sarkozy called a special summit of EU leaders to discuss the Georgian crisis, to be held in Brussels on 1 September.
His office said the summit, arranged at the request of various European countries, would discuss the future of EU relations with Russia as well as aid for Georgia.
Russia's four-day war with Georgia erupted after Tbilisi tried to retake South Ossetia - which broke away in 1992 and was supported by Moscow - in a surprise offensive on 7 August. The offensive followed a series of clashes between Georgian and South Ossetian forces.
| PEACE PLAN No more use of force Stop all military actions for good Free access to humanitarian aid Georgian troops return to their places of permanent deployment Russian troops to return to pre-conflict positions but Russian peacekeepers may take unspecified "additional security measures" International talks about security in South Ossetia and Abkhazia  |
The conflict left hundreds of people dead and created tens of thousands of refugees. Many have been returning to their damaged or destroyed homes since the Russian withdrawal.
The UN's refugee agency UNHCR reported this week that, according to Russian estimates, more than 30,000 people from South Ossetia had fled to North Ossetia. Another 128,000 were estimated to have been displaced within Georgia.
International aid agencies are working on the ground and the US has already delivered some aid by military cargo plane.
The destroyer USS McFaul is reported to be carrying supplies such as blankets, hygiene kits and baby food. The supplies will be unloaded by a floating crane as the port is too shallow for the ship to dock.
Two more US ships are due to arrive later this week.
The BBC's Gabriel Gatehouse, aboard the American warship, said that apart from delivering aid, the arrival of US naval personnel is undoubtedly intended to send a signal to the Russians - that America is serious about its support for Georgia.
But, he adds, the prospect of US and Russian armed forces actually meeting on Georgian soil is one that both sides seem keen to avoid.
Batumi is not a natural harbour for a naval vessel the size of the USS McFaul to dock, but Russian forces have been fortifying their positions at the key port of Poti, further up the coast.
On Saturday, Mr Sarkozy welcomed the withdrawal of Russian forces so far, but urged Moscow to pull its troops back from Poti and Senaki, which is the site of Georgia's main air base.
Russia says it has a duty and a right to keep its forces in a buffer zone around the breakaway territories of Abkhazia and South Ossetia - though it acknowledges that Poti falls well outside that zone.
Beijing bids farewell to Olympics
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Video - Beijing Olympics come to an end
The Olympic Games have drawn to a close with a glittering ceremony inside Beijing's Bird's Nest Stadium.
Spectacular fireworks kicked off the proceedings, while a beautifully choreographed drumming and dancing display recalled the opening ceremony.
It was a more celebratory affair, as exuberant athletes, dancers and musicians got into the party spirit.
The Olympic flag was handed to London mayor Boris Johnson, with organisers briefly showcasing the 2012 Games.
The countdown to 2012 has started, and organisers will know they have a great deal to live up to with China hosting one of the best organised Games in history and staging some of the most memorable opening and closing ceremonies ever seen.
| OLYMPICS BLOG BBC Sport's Tom Fordyce in Beijing |
Scottish cyclist Chris Hoy, who claimed three gold medals in Beijing, carried the flag for Team GB as the 205 flag bearers led the way for the thousands of athletes.
After speeches from Liu Qi, president of the Beijing Organising Committee, and International Olympic Committee president Jacques Rogge, the Beijing Games were officially declared to be over.
China staged the Olympics against a background dominated by fears of pollution, worries over security and protests about its human rights record.
But the sporting action was enthralling, with highlights including Michael Phelps swimming to a record eight gold medals and Jamaica's Usain Bolt breaking three world records on his way to three golds.
"We have come to the end of 16 days which we will cherish forever," said Rogge.
"New stars were born and stars from previous Games continued to amaze us.
"We shared their joys and their tears and marvelled at their abilities, and will long remember their achievements here.
"These were a truly exceptional Games."
 London mayor Boris Johnson accepted the flag ahead of 2012 |
It heralded the start of an eight-minute segment for London organisers to offer a flavour of the 2012 Games, as a red London bus arrived into the stadium.
Hoy, dressed up as a city gent, and fellow British cyclists Victoria Pendleton and Jamie Staff accompanied the bus on bicycles alongside a troupe of dancers holding umbrellas.
Singer Leona Lewis and former Led Zeppelin guitarist Jimmy Page emerged as the bus transformed into a grass-covered carnival float, and the pair combined for a rendition of "Whole Lotta Love".
And the biggest star turn came when former Manchester United star and England captain David Beckham arrived to kick a football into the crowd of athletes.
The Olympic flame was then extinguished, before the attention shifted to a "memory tower" in the centre of the stadium.
Legendary Spanish tenor Placido Domingo and Chinese soprano Song Zuying joined forces to sing, while Hollywood actor Jackie Chan later joined a throng of dancers and singers for a closing number.
The sporting action was finally brought to an end earlier in the day, with France's men claiming gold in the final of the handball.
It was the 302nd and last gold medal to be awarded, and followed Sunday's finals in boxing, basketball, volleyball and water polo, while Kenya's Sammy Wanjiru won the men's marathon.
Saturday, August 23, 2008
For Obama,
Taxes Are About Fairness
On Saturday night at the Saddleback Church in Southern California, Rick Warren showed Jim, Gwen, Tom, Bob and Co. what a presidential moderator can accomplish when he makes the debate about the candidates and not himself.
Over the course of a two-hour, televised forum, the best-selling evangelical author and pastor took a novel approach to our presidential debates. He asked Barack Obama and John McCain the same simple questions -- and then gave them time to answer.
![[Main Street]](http://s.wsj.net/public/resources/images/OB-CC100_oj_mcg_20080818184834.jpg) |
| AP |
| Barack Obama and John McCain with Pastor Rick Warren, Aug. 16. |
For example, here is how Mr. Warren asked the candidates to talk about their flip-flops: "Give me a good example of something, 10 years ago, you said that's the way I feel about [it] and now, 10 years later, I changed my position."
Likewise on abortion: "I know this is a very complex issue. Forty million abortions, at what point does a baby get human rights, in your view?" And again on the Supreme Court: "Which existing Supreme Court Justice would you not have nominated?"
These are not your standard-issue Beltway questions, and their directness made them hard to evade. Nowhere was this more evident than in Mr. Warren's attempt to get the candidates -- both of whom are trying to persuade the American people they are tax cutters -- to draw some fundamental distinctions between their approaches. In simple but arresting language, he cut to the chase.
Here's how he put it: "OK. Taxes. Define rich. I mean give me a number. Is it $50,000, $100,000, $200,000? Everybody keeps talking about who we're going to tax. How can you define that?"
Plainly this is a man who understands that it is easier to get a camel through the eye of a needle than to get a direct answer from a politician running for election. And indeed, while Mr. McCain was at first shy about giving a specific number, in the end he did allow that someone who had an income of, say, $5 million could pretty definitely be said to be rich.
Yesterday's Politico hooted that with this response Mr. McCain handed his opponent the perfect fodder for a TV commercial. That, of course, overlooks those who might actually find attractive Mr. McCain's fuller explanation. "I don't want to take any money from the rich," he said, "I want everybody to get rich."
Mr. Obama, by contrast, started out much more directly, suggesting that if you make $150,000 or less you may be poor or middle class. A family with an income above $250,000, he went on to say, is "doing well." And if you find yourself in that category, he's going to target you for a tax hike -- all in the name of creating "a sense of balance, and fairness in our tax code."
In fact, the idea of fairness is at the heart of his whole economic argument. And he goes back to it in almost every public appearance.
He talks about it as a general theme: "It is time for folks like me who make more than $250,000 to pay our fair share."
He invokes it as a solution for Social Security: "[W]e will save Social Security for future generations by asking the wealthiest Americans to pay their fair share."
He points to how it guides his energy policy: "The first part of my plan is to tax the windfall profits of oil companies and use some of that money to help you pay the rising price of gas."
And he stuck to it on capital gains, even after ABC's Charlie Gibson noted that the record shows increased taxes on capital gains -- which would affect 100 million Americans -- would likely lead to a decrease in government revenues: "Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness."
Translated into ordinary English, what that means is that it doesn't really matter whether a tax increase actually brings in more revenue. It's not about robbing from the rich to give to the poor. Robbing from the rich will do, especially if it's done in the name of fairness.
Now there are good reasons Mr. Obama is not likely to pursue the revenue side of the fairness question. As this newspaper noted in a recent editorial, the latest data from the Internal Revenue Service does not show to Mr. Obama's advantage. As we come to the end of the Bush administration, the top 1% of American taxpayers already pay 40% of all income taxes -- the highest level in 40 years. The top 10% of income earners pay 71% of the taxes.
Mr. Warren, a man of the cloth, has done us a great service by asking the candidates to answer a pretty secular question: What kind of income makes an American "rich"? Maybe in the more secular setting of an upcoming debate, one of our nonpastor moderators could ask the candidates the moral question: What specific rate of individual taxation would it take for the rich to be paying their fair share?
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