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NCREIF highlights US row crop strength and challenges for others

Farmland Opportunity president Jay Girotto says the full land market impact of recent ‘feast, then famine’ production dynamics in Pacific Northwest remains to seen.

Continued outperformance by row crop properties drove total farmland returns of 4.97 percent during the year ending Q2 2021, according to the National Council of Real Estate Investment Fiduciaries.

NCREIF reported 3.73 percent total income and appreciation of 1.20 percent over the previous four quarters for its 1,224-property grouping.

Permanent crop properties delivered total income returns of 4.16 percent and depreciated by 1.56 percent over the past year, according to the index. During the same period, annual cropland properties in the grouping have appreciated 3.07 percent and seen income returns of 3.43 percent to produce total returns of 6.57 percent

“Markets are pretty rational, I think we are seeing about the right numbers,” said University of Illinois professor and NCREIF academic committee member Bruce Sherrick on a conference call.

Sherrick noted the index did show continued effects of crop-specific challenges, which have weighed on some permanent crop farmland portfolios concentrated largely in NCREIF’s Pacific Northwest grouping of Washington and Oregon. He said the index is also beginning to reflect notable increases in annual cropland values most visible through an “incredibly strong” Midwest sales market, during the fourth quarter of 2020 and first quarter of 2021.

Strong commodity prices, inflation concerns, gradual reduction of global soybean stocks and especially strong demand from China, have all contributed to positive sentiment for row crop farmland, according to Sherrick.

“I just think that the fragility, or equilibrium, of the market is somewhat tested right now,” he added. “We get some really notable high sales and really notable low sales; it will be interesting to watch.”

Looking ahead, Sherrick highlighted the influence of continued low interest rates and overall macroeconomic conditions he sees as supportive to strength in farmland values.

“If you look at forward curves and the implied strength of the dollar, if we don’t mess up international demand and we don’t have a replacement of stocks, then I don’t see what’s really in the way of some additional positive performance,” he said.

Permanent crop properties in the Pacific Northwest registered 2.45 percent growth in the second quarter, which followed depreciation of 1.55 percent in first quarter and 6.10 percent during the fourth quarter of 2020, according to NCREIF.

Over approximately the past six to eight quarters, Sherrick explained, NCREIF’s index has registered declining total permanent crop returns he said largely reflect challenging conditions facing specific crops like apples, almonds and wine grapes.

While the impact of those challenges is most visible in the -5.15 total returns registered for permanent cropland in the Pacific Northwest during the past year, he added, 9.33 percent returns for the region’s annual cropland over the same period shows that performance has not been uniform.

Jay Girotto, president of Farmland Opportunity – a Cedar Rapids, Iowa-headquartered farmland manager that contributes data to NCREIF – said on the call his firm’s dryland winter wheat properties in Oregon and Washington give it visibility into farmland market conditions in the Pacific Northwest.

Although the current drought is contributing to yields one to two thirds lower than average, which have yet to be factored into land prices, he explained, the region also experienced a record harvest in 2020.

“It’s feast and then famine, basically,” he said. “The farmers continue to be the main buyers in that area and certainly their net farm income was very high, if not record high, last year. It will be interesting to see what happens here in 2021.”