Inflation and ag within Biden’s spending plans

Agricultural asset managers have had reason to bemoan the absence of inflation many predicted would follow post-global financial crisis spending by governments early last decade.

Recent attention to inflation risk stemming from the Biden administration’s proposals for trillions in post-pandemic and infrastructure spending is feeding institutional interest in ag-related real assets, but an unusually cloudy macroeconomic picture makes it hard to predict how investors will react.

In a mid-April blog post, White House policy economists Jared Bernstein and Ernie Tedeschi highlighted that unusual conditions and supply disruptions in the post-pandemic economy could negatively skew inflation perceptions. While pent up demand and fiscal response could create some short-term inflation, they wrote, any such spike will likely fade quickly along with the pandemic’s influence on economic activity.

“The longer-term trajectory of inflation is in large part a function of inflation expectations,” Bernstein and Tedeschi wrote. “Here too, we see some increase, but from historically low to more normal levels.”

Despite such statements of confidence, investors have voiced concern that higher levels of inflation could threaten economic recovery.

Blackstone chief operating officer Jon Gray highlighted inflation risk on a recent earnings call, where he discussed his firm’s interest in assets “that look and feel as the least bond-like as possible” in response.

Oaktree’s Howard Marks devoted portions of a memo late last year to uncertainties surrounding inflation, including the possibility a spike in prices could inspire the US Federal Reserve to raise interest rates. Marks wrote that while the Fed and Treasury Department’s policy response to covid-19 was “brilliant” and necessary, its long-term effects are unpredictable.

“I have no idea whether we will see inflation, stagflation, disinflation or deflation and Oaktree won’t bet on any of them,” he wrote. “Not that it wouldn’t be nice to know what the future holds in these regards; rather it’s simply that most investors – and certainly we – aren’t capable of superior judgements about the macro. So why bet?”

Indeed, a February blog post by Peoples Company’s Matt Adams highlighted that although strong commodity prices and a “devalued/inflated dollar” are among reasons for optimism in farmland markets, an environment of indecision might cause buyers to “act differently.”

“Some will be excited about the prospect of owning farmland in today’s market, or the elevated prices will direct them to the sidelines while they wait for a price correction,” he wrote. “Current farmland owners could find themselves at a fork in the road and choosing between selling their farmland in a hot market or holding onto their farmland, aspiring for continued appreciation beyond the values of today.”

In the absence of the inflation some expected would follow the GFC, many institutions came to see agriculture more through the lens of sustainability and their roles as stewards of natural and societal assets. They have also been presented additional options to protect beneficiaries against inflation through more developed markets such as infrastructure, treasury inflation protected securities, gold and related financial instruments.

Debates about inflation risk and how to measure it involve the same demographic, political and social trends that frame the investment case for agricultural real assets. Managers of farmland, timber and other inflation-hedging corners of ag should harness that overlap in coming months as they take in developments surrounding the Biden administration’s proposals and prepare their LPs to navigate a future few can currently see clearly.