Negative cumulative farmland returns reported for the first time since 2001 are an unsurprising reflection of long-present market factors, said University of Illinois professor Bruce Sherrick.
NCREIF recorded a -0.10 percent total return for farmland during the three months ending March in its Q1 quarterly index published in late April. The index showed returns beneath both the 2.34 percent total growth recorded during the previous quarter and the 0.70 percent reading shown for the first quarter of 2019.
“Supply and demand always determine the price of things and we’ve brought a lot of production on around the world in certain commodities,” said Sherrick on NCREIF’s conference call last week – the professor also leads the TIAA Center for Farmland Research.
“The value of the future income brought back to today is just not looking as attractive as it used to. There are a lot of impacts from the trade disruption that we’ve had for the last year and a half to two years, that take a long time to work their way into the system. The uncertainty about export markets is real and truly impactful.”
Sherrick stressed that in the context of recent equity market volatility, the approximately 4 percent trailing year return for all farmland reflected in the first quarter index, is likely more attractive to investors today than it was a few years ago.
He also highlighted that the first quarter index’s reading of 4.25 percent trailing year returns for permanent crop properties and 3.69 percent for annual crop farmland, are both within the range of most investors’ expectations.
“I always look at a fixed gap over treasuries and 3 to 3.5 percent has been a number we’ve been targeting as agricultural returns for some time,” he said. “Is 3 percent a small number anymore or a large number? I don’t know. Three percent returns as a new benchmark may not be so bad.”
While it is not unexpected to see adjustments to farmland income occur over time, Sherrick said, the asset class has suffered, to some degree, as a result of expectations for future growth failing to keep pace with rising land valuations over the past decade.
Especially for properties in the middle of the country, he said, rising incomes from higher commodity prices during the early years of the last decade informed asset values in ways that showed markets have functioned correctly.
“All of that income wasn’t capitalized into asset values immediately and as rates were falling, that all worked out as I expected it to and as most people did. We are just at the low point,” he said. “I just view it as: right now, we’re are at a cyclical low and a secular low and I don’t think it’s terribly out of the ordinary, actually.”