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Trend 2018: Shrinking land yields but opportunity in inputs

The US ag market should reach a bottom next year provided the central bank-driven bubble doesn’t burst into a hard landing, according to MacroGain’s Jim Budzynski.

In some respects, macroeconomic trends respond to basic impulses. How these play out will define much of the global investment landscape in 2018, said Jim Budzynski, managing principal of MacroGain Partners.

“The global economy has a simple dichotomy,” he told Agri Investor. “Will the central bank driven bubble in all assets (especially real estate, bonds, and equities) continue to expand or will the tentative central bank steps at normalizing interest rates and reforming bloated balance sheets abruptly end the party? Will global economic tensions rise (or explode) as the “liquidity water hole” shrinks?”

‘Distress pockets’

Big questions will also hang over the US market. “Will the pain in the heartland become unbearable and finally result in asset turnover?” Budzynski asked.

He pointed out that the “farmer distress pockets” in corn and soy country continue to expand, especially where poor soils, or poor weather, “didn’t allow the higher yields that many enjoyed in 2017.” It did not help that these higher yields contributed to weak prices.

“Even with this pain, it seems plausible that 2018 will be a bottoming year and that we will finally see broadly improving ag fundamentals in 2019,” he noted. “Let’s hope trade tensions don’t upset the NAFTA apple cart at just the wrong time!”

A similar dichotomy applied to the ag investment environment, which Budzynski said “could be either serene or violent in 2018.”

“A key question will remain whether the global party continues”
Jim Budzynski, MacroGain

Institutional land investors will continue to focus on higher-value crops and operating models, he said, though he warned they are seeing shrinking cash yields as asset values rise, particularly in the US.

The lot of buyout firms was seen as more encouraging, especially those focusing on later-stage companies. “Private equity investors will see good pockets of opportunity as ‘second-derivative’ assets become available following input supplier M&A. Venture capital markets will continue to see the shrinkage of early stage investing (and continued focus on later rounds and bigger deals), where agronomy and automation seem the biggest opportunities.”

Yet he noted agri was only one but many asset classes will look at next year – with some poised for significant shake-ups.

“Of course, since very few investors are solely focused on this industry, a key question will remain whether the global party continues, lest ag investing takes a back seat as more pressing issues elsewhere in the portfolio consume investors’ attention.”