Alongside the flashier sectors that generated strong returns throughout the volatility of the past year, row crop farmland – the broad swaths of land on which farmers grow crops such as wheat, corn and soybeans – demonstrated resilience and performed well.
With improved underlying commodity fundamentals reflecting record demand from China, corn and soybean prices have rebounded 70 percent since mid-2020 to seven-year highs, setting the stage for a multi-year upcycle in the asset class.
The institutional rationale for investment in row crop farmland is historically based on five key attributes: consistent cash income; inflation protection; portfolio diversification; capital appreciation; and the opportunity for sustainable investing. Each of these attributes holds true for the foreseeable future.
Farmland is negatively correlated with most traditional asset classes, including stocks and bonds, and is only somewhat correlated with commercial real estate. This provides portfolio stability during volatile markets while enhancing a portfolio’s risk-adjusted return. It also has a positive correlation with inflation and is considered a strong inflation hedge. In fact, many investors view it as more favorable than other hard assets such as gold because farmland produces positive cashflow while shielding from the deleterious effects of inflation.
Row crop farmland consistently produces cash income of between 4 and 6 percent and capital appreciation. Meanwhile, as demand for agricultural products increases, farmland increases in value. Together, returns for institutionally-owned row crop farmland have generated total returns of 9.6 percent since 1990, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) Annual Commodity Cropland Index.
Importantly, the investment thesis is underpinned by the aligned interest of both farmers and farmland investors to protect their land through sustainable farming practices. Recent efforts to quantify and standardize sustainable farmland management have led to a diverse set of stakeholders – farmers, conservationists, landowners and investors – coming together to form the Sustainable Agriculture Working Group, which in turn led to the creation of the Leading Harvest Standard.
China will drive demand again
Droughts in Europe and in South America have cut forecast 2021 corn inventories by more than half, and even caused Argentina to suspend corn exports to assure sufficient domestic supply. These regions have now largely turned to the US to meet demand.
Similarly, China is now importing record levels of soybeans and corn from the US to rebuild its massive herd of hogs that were decimated by African swine fever in 2018 and 2019, and to meet obligations mandated by phase one of the US-China trade agreement. This is a remarkable, if not surprising, dynamic shift.
For more than 20 years China has dominated the global soybean trade. Analysts have long believed that China, the world’s second largest corn producer behind the US, would eventually need to become a major corn importer as well. It seems this time has come. According to data from the USDA Foreign Agriculture Service, from the September 1 start of the marketing year for the 2020 corn crop, Chinese commitments for US corn exports are already more than 600 percent higher than the highest previous full year.
The net result of all these factors has been a rebound in corn and soybean prices on the Chicago Board of Trade with prices at seven-year highs. Perhaps more important still, the price of corn on the Dalian Exchange in China is at an all-time high, which suggests China’s appetite for imports will continue.
Row crop’s outlook
At the public farm auctions we attended in Q4 2020, we observed prices were up 9.1 percent over Q4 2019. In the same quarter, the average annual appraisal of Ceres Partners’ proprieties increased almost 6 percent. These increases reflect improved fundamentals in the grains market, which directly translate into farmland, and offer a three- to five-year time window of runway for continued growth.
Equally noteworthy is the tried and tested resilience of farmland even during tough times.
The grain market faced challenges over the past seven years, and more recently the US-China trade war reduced US exports of soybeans by more than 60 percent from 2017 to 2019. Simultaneously, overall benign weather patterns led to record harvests and inventories, and a strong dollar weighed on pricing. Despite these significant challenges, the NCREIF Annual Commodity Cropland Index never had a negative year, and only posted one negative quarter.
What does this mean for investors who have held positions in the sector? Even through tough times in the grain market, row crop farmland as an asset class has performed. Coming out of this depressed grain market with strong tailwinds to sustain growth, we are confident in the future of farmland.
Often overlooked, the market for row crop farmland provides myriad benefits to institutional investors. Given current crop pricing and a confluence of external factors, there is now a unique entry point into this asset class. It is time for investors to strongly consider the benefits of adding row crop farmland to their portfolios.
Perry Vieth is the founder and CEO of Ceres Partners, a specialist investment manager focused exclusively on food and agriculture.