July 20, 2020

By Jeremy Stroud,  with contributions from Brent Lawson and Eamonn McGuinty

The foundations of the modern agri-food value chain have been tested in recent months. With the spread of COVID-19 causing remarkable supply and demand disruptions, we are arriving at a fascinating junction in the world of food business. Some farmers and agricultural outfits, generally those with a nimble operating model and a future-oriented product-offering, have thrived. Others have been less fortunate. As a result, we have seen many firms use these circumstances as an opportunity to re-evaluate their operating risks and consider the trade-off between building a business for efficiency versus resilience.

Farmland Transactions and Changes in Value

Commodity prices, retail volumes, and supply-side narratives are relatively easy to track, but several clients have inquired about farmland values and transactions. As land accounts for nearly 80 percent of farm assets, changes in market dynamics can significantly impact the industry.(1)  In deploying capital in farmland before and during this pandemic, as well as speaking to several other agricultural investment professionals in Australia and the United States, we have noticed a few themes and points worthy of note:

Farmland Values

~ Transactions that have occurred have generally shown similar values to sales occurring prior to the lockdown. An exception to this rule is the tendency for lower values in estate sales and liquidity events. Transactions that take place as a result of liquidity events tend to close at a lower price than the market average due to the motivated nature of the vendor.

~ Landowners and farmers have also looked to rebalance their portfolios since the pandemic began. In times of uncertainty they generally dispose of their periphery or marginal assets and keep a greater cash reserve on hand. Due to farmland values appearing as an average, they may naturally appear to have decreased if other variables such as soil type, fertility, erosion, irrigation, drainage, and crop versatility are not controlled for.

~The NCREIF Index, which measures transactional data based on a nation-wide sample in the United States, saw farmland values decline by 0.49 percent from January to March 2020.(2)

The Land Acquisition Process

~ Digital real estate technologies, coupled with the naturally distanced characteristic of farming, have allowed transactions to take place smoothly.

~ The rise of drones in agriculture have allowed for the completion of many necessary tasks in a typical farmland acquisition and due diligence process. They are now ubiquitous in the farmland real estate industry for both operational and transactional purposes.

Liquidity and Transaction Frequency

~ More farms appear to have been listed for sale in May/June compared to March/April. Transactions in farmland historically tend to spike after most harvest revenues are realized in November to February. The market’s response to this timeframe will test the validity of liquidity concerns in the coming quarters.

~ Some believe that increased liquidity flowing from government lending programs, as well as low interest rates and a limited supply of farmland, have helped support prices for certain transactions.

~ Anecdotally, the farmers, brokers, and investors we consulted have noticed COVID-19 prompting older farmers to sell their assets or mobilize their succession plans. These are generally individuals who have considered retiring for at least several years, many in their seventies and eighties. As the average farmer’s age edges towards 60 in the United States, we expect to witness more succession activities through the 2020’s.(3)

In Summary 

At a time when valuation principles are fluctuating for most asset classes, farmland has largely remained grounded in reality – that of the resilience and earnings potential of primary producers. Looking forward, many expect relative stability with potential pockets of depreciation in specific regions that have been disproportionately hit by COVID-19 complications. While first quarter return numbers have shown stability, Q3, Q4 and Q1 2021 data releases will be the true test of strength for farmland as an alternative asset. Despite transitory volatility, we expect that high-quality farmland with renewable freshwater access, low erosion risk, and strong soil health to continue appreciating in the long-term.

1. Successful Agriculture, 2020
2.  National Council of Real Estate Investment Fiduciaries, 2020
3. USDA Census Snapshot, 2019

ABOUT THE AUTHORS:

Primary Author:

 Jeremy Stroud is an impact investment professional and postgraduate student at the University of Oxford. He offers insights on global agriculture, water, infrastructure, and finance. Stroud has volunteered and worked with primary and vertically integrated agricultural groups in the Americas, Europe, and Africa. With experience in sustainable farmland investing and asset management for institutional investors, he places a long-term, sustainability-oriented lens on all projects.

Contributing Authors:
Brent Lawson works as an associate for Root Agricultural Advisory, a farm management and real estate firm in the Mountain West. He assists in sourcing agricultural investments, facilitating due diligence, financial modeling, and portfolio management for clients.  He has developed an independent consulting practice assisting clients in economic analysis and financial modeling for real asset investment strategies. Brent previously worked in investment management at PIMCO and received a degree in Economics from Yale.

Eamonn McGuinty is focused on the intersection of international trade, agri-food management, environmental sustainability and overarching disruptive technologies. He has worked in a variety of settings and is currently engaged with private and public companies to help them grow and succeed internationally within the natural resources sector. McGuinty keeps it simple: maintain a global mindset and instill entrepreneurial ambition.

*All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, GAI Gazette, or parent company HighQuest Group