Agriculture as an asset class navigated through 2020 relatively unscathed from the covid-19 crisis.
Though there were both positive and negative economic factors arising from the pandemic and its impact on economies, on balance, its effect on agricultural markets and economies was relatively neutral overall.
Higher-quality farmland assets in particular demonstrated strong resilience through the crisis and attracted investor attention in the latter part of the year. Investors are increasing their focus on farmland assets with input and market optionality, low-cost structures and propensity for mechanization. As the covid crisis potentially continues into 2021, we expect this relatively neutral impact to continue.
Institutional investor interest in farmland assets will likely continue its long-term trend upwards. Farmland markets in nearly every major developed market in the world demonstrated positive appreciation and income in 2020, demonstrating that the asset class is generally uncorrelated with traditional investments or broader geopolitical factors, thanks to its fundamental necessity in our daily lives. We expect to see institutional investors continue to allocate more capital in 2021.
We foresee similarly increased interest in food production, with a particular focus on food-tech, ag-tech and food processing. This broadly dovetails with an increased investor focus on private real asset markets. Investors are also increasingly focusing on the social good that comes about from the production of food in a sustainable manner. Agricultural production can be undertaken in a sustainable manner and in doing so, provides society with products that are of the greatest necessity.
We forecast broad agricultural commodity prices trending sideways in 2021. Agricultural commodities that were negatively impacted by covid-19 will likely see broad price appreciation as producers and consumers adjust supply chains and consumption patterns to increase demand for these commodities. We believe agricultural input costs (other than energy) will trend slightly downward over the course of 2021 as adjustments to supply chains allow for additional supply to hit agricultural markets.
We foresee agricultural lenders focused on land-backed loans continuing to increase their exposure to the asset class. Like equity investors, lenders have witnessed the relative resiliency of their land-backed lending portfolios through the crisis. Unlike in other lending sectors, farmers have generally been paying their banks in 2020 and although some have experienced disruptions in their cash cycles, properly leveraged farmers have generally fared well.
Finally, a trend that we’re likely to see continue is that of consumers in developed countries shifting more of their food consumption toward organic products across all food categories. This will put positive pressure on land values, particularly land capable of organic production or regions where a strong industry ecosystem for organic food processing takes hold.
Investors who can properly execute on organic conversion will be rewarded with return premiums, but investors should be cautious as this process is not without inherent execution risk and will often raise yield and price volatility.
Increased traceability, freshness and the healthiness of food consumption are long-term consumer trends the coronavirus has only served to accelerate. Consumers living through a covid-19 world are increasingly focused on the healthiness of their food.
Scaled agricultural businesses located in core producing regions can serve this increasing need in a more efficient manner than sub-scale operations or production coming from regions, where the regulatory environment is less clear. In this environment, farmers should be able to capture market prices above basic commodity levels if they can clearly demonstrate to consumers and retailers their products are fresh, thus leveraging consumer desires for local and farm-to-table, are traceable, and that they are healthy.
Overall, the farmland asset class is poised for a solid 2021 having demonstrated clear resilience through a challenging 2020. Investors who were already invested were rewarded with solid performance (both income and capital gains) as well as stability in the face of major social, geopolitical and economic disruption.
2021 will see greater investor interest in this growing asset class, with particular focus on high-quality assets, managers and farmers.
Matthew Corbett is agriculture partner at Fiera Comox.