Farmland - Next Property Bubble or Undervalued Asset?

Following the bull run in metals and oil, agricultural land prices are rocketing as big money pours into the sector.

"You can't make it. And, as the world gets bigger and bigger over a period of time, the pressure on land and land use is going to increase," said Clive Hopkins, partner at Knight Frank.

Soaring agricultural prices, growing demand for biofuels and the growth of the Chinese and Indian economies are leading top global investment banks to buy farmland in a bid to embrace the physical commodities market.

Investment banks and hedge funds are mopping up vast tracts of agricultural land around the world, hoping to ride the so-called "commodities supercycle" that has lifted prices of everyday agricultural commodities such as wheat, rice, soybeans and corn to record highs.

U.S. investment bank Morgan Stanley has bought several thousand hectares of land in Ukraine, Europe's grain basin.

Morgan Stanley declined to comment, but industry executives say many other big banks are looking at land.

Barclays Capital, the investment bank arm of Barclays, is actively searching.

"We are looking at a lot of opportunities in those sort of things. We are looking across the board. We certainly wouldn't rule it out," said Roger Jones, co-head of commodities at Barclays Capital.

Banks are not the only ones going back to the land.

Fund manager BlackRock has a hedge fund that invests in agricultural land. International estate agents Knight Frank is setting up one to buy agricultural land in the UK.

Industry experts say hedge funds have bought thousands of hectares of corn and sugarcane plantations in the United States and Brazil, illustrating how even purely financial players are moving beyond paper markets into real assets.

"Farming is going to be one of the best places to make money in the next 10 years if you know what you are doing," investor and commodities guru Jim Rogers told Reuters in an interview earlier this month.

Investors say the possibility of commodities demand outstripping supply is driving the trend that could intensify given the pace of growth in China and India.

With nearly 2.5 billion people, the two countries are home to nearly a third of the world's population.

As their economies grow, pulling millions out of poverty, this will drive up consumption. China and India could trigger a wave of demand that existing supplies will struggle to meet.

"Over the next five years, you will have 2 billion more people eating bread, eating noodles, drinking coffee ... There is no way in this world that the supply side can catch up with the demand side," says Badung Tariono, an Amsterdam-based fund manager for ABN AMRO.

That is not all. Pressure on arable land will also come from rising demand for biofuels and for grains for cattle to provide meat to emerging markets.

"The use of foodstuffs to make energy substitutes -- corn and sugar for ethanol and palm oil and soy oil for biodiesel -- has created a fresh layer of demand," says Edward Hands, a portfolio manager at Commerzbank Corporates & Markets.

"Supply is inelastic. It's not easy to increase the acreage to produce crops. Effectively your supply curve is fixed and your demand curve is moving to the right," he added.

Financial players also realise that agricultural land is a limited resource, and who controls it now could well reap windfall gains later.

Analysts say having a stake in the agricultural process is an extension of a trend among financial players to embrace physical assets to gain greater insights into paper trading.

Banks, hedge funds and private equity funds have over the past several years built sizeable interests in physical infrastructure in the energy sector, with assets ranging from ships to pipelines to power stations.

"There is this craving for real assets. Banks have become more and more physical in their investments," says Francisco Blanch, head of global commodity research at Merrill Lynch.

"In any resource sector, if you want to get involved, you always want to be in the upstream. It doesn't matter whether it's mining, whether its oil and gas or agriculture," says ABN AMRO's Tariono.

"The highest return you get is always in the upstream. The upstream side of the business has higher risk. So you need to be compensated with higher return."