May 28, 2020

By Lynda Kiernan, Global AgInvesting Media

Co-chaired by AgIS Managing Principal and President Jeff Conrad upon its launch in 1995, the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index is a widely relied-upon tool that includes data gathered from 1,163 investment-grade U.S. farm properties with a total market value of $11.7 billion.

Broken down, the index is comprised of 902 annual, and 261 permanent cropland properties, of which 374 are in the Corn Belt; 232 are in the Pacific West; 141 are in the Delta Region; 115 are in the Lake States; 87 in the Pacific Northwest; 85 in the Mountain States; 66 in the Southeast; 36 in the Northern Plains; 21 in the Southern Plains; and six in the Appalachian Region.

From this collective, NCREIF offers the ability for institutional investors to identify the risk of farmland investment across the U.S. assisted by data provided by Hancock Agricultural Investment Group, Gladstone Land, Farmland Opportunity, Prudential Agricultural Investments, UBS Farmland Investors, US Agriculture, and Westchester. 

Conrad noted in his piece “A Decade in the Farmland Asset Class Evolution” published in GAI News in January 2018, “During the last decade, as farmland has gained greater prominence, the index has been increasingly recognized and referenced by the academic and investment communities, which now identify it as the bellwether source of metrics for tracking and analyzing the asset class and its performance.”

In a Year of Living Dangerously

It’s almost hard to remember. But the very early days of 2020 began with a feeling of, dare I say it – optimism. But with the arrival of COVID-19 and the spread of the ensuing global pandemic, businesses were shuttered and societies hit pause as people were advised to stay home. Meanwhile, agricultural supply chains were disrupted, bringing to light hereto unforeseen weak points in our food systems that are proving costly at all points along the value chain.

These unprecedented circumstances led to what Putnam Investments termed “The most challenging quarter in decades”. 

Indeed, NCREIF released its first quarter results for 2020 for its Farmland Index citing total returns for the quarter of -0.10 percent – down from 2.34 percent in the previous quarter, and 0.70 percent in the same quarter a year before. 

This marks the first time since Q4 2001 that the Farmland Index has posted a negative total return – comprised of an income return of 0.38 percent and appreciation of -0.49 percent.

Income return for Q1 for the Total Farmland Index was 16 basis points below Q1 2019 when income return was 0.54 percent, as farmland values also declined in the first quarter led by permanent cropland, which posted appreciation of -0.84 percent, following -0.70 percent in Q4 2019. 

However, annual cropland outperformed in Q1, posting total returns of 0.66 percent, with cropland appreciation of -0.27 percent and annual cropland income of 0.93 percent.

While these numbers reflecting the first negative total return for the Index in nearly 20 years may not seem particularly inspiring at first glance, when compared to the performance of other indices, they are reflective of the strength of farmland as an asset class amid incredible volatility.

After 135 years, and hinting at reaching 30,000, the Dow Jones Industrial Average finished Q1 having fallen by more than 23 percent – marking its worst beginning to a year in its history.

The Russell 3000 Index, which provides exposure to 3,000 of the largest U.S. traded stocks,  fell by 20.9 percent for the quarter – its worst performance since Q4 2008.

The QQQ Index, which tracks the Nasdaq 100 index, tried to put a positive spin on a terrible quarter by saying it outperformed the S&P 500 Index, claiming a  total return of -10.29 percent.

However, that’s not a significant boast when the S&P 500 posted a total return for Q1 of -19.60 percent – its worst quarterly performance since 2008. (Of all sectors, Energy was the worst for the S&P, posting a decline of 50.46 percent for the quarter). 

And to round things out, the Commodities Index posted a sharp decline of 23.3 percent, and Nareit, an index tracking U.S. real estate investment trusts (REITs), saw earnings decline across all REITs by 9 percent for Q1.

Low Interest – Continued Strength

One thing is certain, the global economy will be deeply challenged and changed by COVID-19. Hancock Natural Resources Group noted in its recent report, Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, the pandemic has already significantly affected the food, feed, fuel, and fiber markets – both domestic and international. 

Demand for all four categories has been widely hit, which combined with disruption to agricultural production, distribution, labor, transportation, and shifts in consumer habits, and global trade upheaval, are factoring into what could likely be one of the worst global economic downturns in history.

However, farmland values are being predicted as remaining steady thanks to low interest rates and high rents. In addition, the CARES Act, which includes $19 billion in financial assistance to U.S. farmers, food assistance programs, the contraction of the U.S. dollar, and broader access to credit for small businesses, are all expected to bolster the country’s growers – who should also see an income benefit due to lower input costs and a drastic decline in energy costs.

These factors are not unnoticed by institutional investors who are increasingly focused on stability in their investment portfolios. As the most essential sector charged with feeding us all during 2020’s pandemic, we expect growing allocations to agriculture asset classes in coming quarters.

– Lynda Kiernan is editor with GAI Media, and is managing editor and daily contributor for Global AgInvesting’s AgInvesting Weekly News and  Agtech Intel News, and HighQuest Group’s Oilseed & Grain News. She is also a contributor to the GAI Gazette. She can be reached at lkiernan@globalaginvesting.com.