AgIS Capital report IDs opps amid headwinds – exclusive

Agri Investor has obtained a first look at an inaugural State of the Market report from agri private equity investor AgIS Capital outlining the headwinds US agriculture faces in 2017.

The review of leading market indicators, from the NCREIF indices to farm incomes and debt levels, offers a sobering outlook but also points to investment opportunities amid less-than-ideal market conditions.

“A strengthening of the relative value of the US dollar, falling commodity prices, and rising labor costs are squeezing crop budgets,” according to the report. “These factors, combined with looming increases in interest rates and the prospect of significant changes being made to US immigration and trade policy, have the potential to materially influence some segments of the US agriculture sector this year and beyond.”

The report shows that the 2017 net farm income forecast from the USDA, is 50 percent lower, in nominal terms, than the $123.7 billion achieved in 2013, a reduction that is “largely expected to be attributable to a continuation of steadily falling commodity prices since 2013.”

Both farmland and row crops had a rough 2016. The NCREIF Farmland Index in 2016 logged a 5.2 percent income return and 1.9 percent capital return, the lowest since 2009 and 2001, respectively.

Meanwhile, the NCREIF Row Cropland Index exhibited particularly poor performance; income and total return dipped to 3.6 and 4.7, respectively, the lowest registered the index began in 1991.

“AgIS believes passive row cropland investments offer limited value given the current margin squeeze and we expect the value of cash rents and farmland to fall further in the coming years,” according to the report.

The two leading crop commodities in the US, corn and soybeans, experienced nominal per bushel declines of 50.6 percent and 34 percent between 2012 and 2016, respectively.

Wheat, alfalfa, cotton, rice, and sorghum, experienced similar declines during that period, driven in part by global expansion of row cops, which could potentially lead to “a long-term, structural oversupply of major row crops.”

So what does this mean for investors?

While row crops have performed poorly, AgIS believes permanent cropland remains an attractive investment. The NCREIF Permanent Cropland Index posted a total return of 10.1 percent in 2016, with income returns of 7.2 percent and capital returns of 2.8 percent.

“We still see strong investment opportunities in agriculture outside of the corn, soybean, wheat, and rice crop segments,” according to the report.

In addition, as farmland values dip, AgIS advocates moving beyond the “buy-hold-lease” farmland strategy, investing in platforms that integrate and improve farming operations. 

“Integrating activities throughout a supply chain can enable agribusinesses to capture value by reducing the costs associated with transacting in the market,” the report reads.

“AgIS Capital is currently focusing on food crops and products that are primarily destined for US consumers, rather than on feed, fiber and fuel crops. We believe that, now more than ever, investing in these types of integrated platforms will be the key to maximizing the risk-adjusted returns of agricultural investments.”