Seats on the Minneapolis Grain Exchange now sell for $275,000. Only a few decades ago, plaintive notes in the visitor’s gallery offered seats for $10,000. David Ricardo, perhaps the greatest economist of all time, explained the whole process 200 years ago: The value of an asset varies with the income it produces.
That was true for British farms during the Napoleonic wars. It holds today for commodity exchange memberships, New York taxi permits, and land on Minnesota’s wind-swept Buffalo Ridge. The implications are profound.
Ricardo, one of the few economists to get rich, did so as a London bond speculator while still in his 20s. Military successes and failures in the wars against France induced enormous swings in the value of British government bonds. Ricardo was astute or lucky enough to make profitable trades.
The wars also increased the price of wheat and other foodstuffs in Great Britain. But farming did not become correspondingly more lucrative for people working the land. Instead, higher grain prices increased the value of the land. Landowners, often absentee ones, got richer. Farm workers toiling to plow or reap did not.
Moreover, the increase in the value of land varied directly with the productivity of the land. Prices for fertile land in warm parts of England with good rainfall increased a great deal. Those for land in poorer farming regions increased less. The value of farmland depended on the value of what it produced and on what it was expected to produce in coming years.
That insight applies to all sorts of assets. The value of a share of stock or a bond depends on what it will produce in cash flows. The value of a taxi cab permit depends on profitability of pushing a hack. The value of a commodity exchange seat depends on the profits from ownership, either in annual income or anticipated sale of the seat in the future.
There once were many active exchanges. In 1900, a seat on the Boston Wool Exchange was worth as much as one on the Chicago Board of Trade. A century later, the Wool Exchange is a fading memory while a full CBOT seat fetches nearly a million dollars.
Like memberships in other small commodity exchanges, prices for those in Minneapolis languished in the doldrums for a long time as Chicago gained a larger and larger share of total business. But as ag prices have increased, trading grain has become more profitable. Moreover, the Minneapolis Exchange may be bought up by some larger exchange. So membership prices have soared.
Wind to generate electricity may be free, but good sites to erect towers in windy areas like southwest Minnesota are scarce. Anticipated revenues from selling wind rights are pushing up land prices as a result. That is great for landowners, but not necessarily for guys driving tractors if they don’t own the land.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.