A new farmland financial index could bring liquidity to the farmland market, say the developers of the PeakSoil Iowa Cropland Value Index. Paul Kanitra, PeakSoilIndexes president, sees it providing investment vehicles on par with other commodities.
The PeakSoil Iowa Cropland Value Index is derived from recorded Declaration of Value documentation from 20 randomly chosen Iowa counties.“The index hopefully creates a derivatives market for farmland, bringing greater liquidity to the asset class, enabling more investor participation without owning the physical commodity.”
The index can be used for both OTC and exchange-traded derivatives.Its developers include Iowa State University economists Dermot Hayes and Mike Duffy. (See peaksoil.com.)
The index opens the farmland market to investors and speculators, but does it serve farmers? Below are the views of two ag economists:
“Because farmland price cycles are so long, who would bet against a trend over long time horizons other than speculators?” asks Ed Lotterman, Real World Economics columnist. “I’m skeptical of the expanding derivative and tradable indexes divorced from the underlying commodity. Two examples are/were a college tuition index, and in the 1990s, white and black shrimp contacts on the Minneapolis Grain Exchange.
“This index enables speculators to get into land in a sterilized way.”
”By definition, a commodity is a uniform, homogenous thing like #2 Yellow Corn,” says Steve Taff, University of Minnesota Extension ag economist. “Farmland is anything but uniform.”
Kanitra responds: “The largest exposure for many farmers is the land they own. There’s currently no way to hedge that exposure. How could it (a related futures contract) not serve farmers?” At this point, his firm offers a farmland index, with hopes of a related futures contract.