Is farmland the next bubble? 

Hedge funds are investment vehicles that offer “inflation protected performance.” Assets in these funds have now reached a record  $2.02 trillion. And hedge fund managers have been gobbling up acres and acres of American farmland.

The New York Observer reports that “Kansas and Nebraska reported farmland prices 20 percent above the previous year's levels and are on pace to double values in four years.”

So will farmland be the next big asset bubble? The Kansas City Fed president seems to think so:

“The purchase of farmland both in America and abroad by outside investors has increased-so much so that in February, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned against the violent possibilities of a farmland bubble, telling the Senate Agriculture Committee that ‘distortions in financial markets’ will catch the U.S. by surprise again.”

The thought of yet another bubble bursting in the fragile American economy is scary. Even scarier is what’s driving these investment bankers into Green Acres:

“This is happening in part because investors see their play as a hedge against hyperinflation. While the rest of the world uses the current calculation of the Consumer Price Index as a proxy for the cost of goods, some farmland investors are using a different equation, one from 1980. These investors assert inflation should be calculated the way it was before the Boskin Commission's 1996 reworking of the CPI formula, in which case, it would be much, much higher. … something closer to 6 or 7 percent on an annual basis.”

If investors are already pushing up the price of prime farmland to hedge against the possibility of hyperinflation, will sharply higher food prices be far behind?

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