It’s not every day that one of the most respected and widely cited US farmland indexes – the National Council of Real Estate Investment Fiduciaries – posts a negative quarterly return for the asset class.
Actually, the last time this happened was 19 years ago, but it’s exactly what we got for Q1 2020.
The key figures are as follows: NCREIF recorded a -0.10 percent total return in the three months to March 2020. Returns for the previous quarter were 2.34 percent and the Q1 2019 returns rate was 0.70 percent.
In trying to understand the significance of the negative quarter and what it could indicate about the trajectory of the asset class, the first thing to note is how small the negative return number is – it’s a fraction of a percentage point.
University of Illinois professor Bruce Sherrick, an academic member at NCREIF who helped set up the index almost 30 years ago, told Agri Investor he believes the small figure – in the context of the coronavirus turmoil – should be as significant a takeaway as the fact of the negative quarter itself.
“I don’t feel there is anything particularly shocking about it, relative to equities or anything else you can do,” said Sherrick. “The story to me that is at least as interesting is there’s less of a move compared with virtually everything else.”
What’s more, he added, the “accounted for effect of covid-19 in the first quarter is fairly low,” and what cannot be ignored is that it’s “hard to talk about quarterly anything if you sell a crop once a year.”
Where covid-19’s impact has been more keenly felt is with regards to the animal protein supply chain, said Sherrick, where animals have been destroyed and produce dumped due to drastically reduced demand as a result of food service and processing factory closures.
Even here, Sherrick believes the long-term experience will show this to be a period where a chunk of revenue was lost, but won’t grow to become an issue that poses a challenge for farms over an extended timeframe.
“In a year or two, [covid-19] won’t be the headline,” he explained. “I think that’s like the toilet paper effect – we’re going to consume the same amount of everything eventually, so I don’t expect it to have a major impact on ag.”
The bigger long-term danger for the asset class – which was far more of a contributory factor to the Q1 results than covid-19 – is the trade war between the US and China. Sherrick said that this, to a large extent, is what we’re now seeing play out in the NCREIF numbers.
“If you don’t have access to long-term trade markets, any time you don’t grow a bushel here, you just give that bushel to Brazil or Ukraine,” he explained. “And any time you spend too much to grow a bushel of corn, all that you do is reallocate who is hungry in the world, not who makes the corn. That’s a devastatingly bad long-term potential if we can’t get back to productive trade. That to me is truly the long-term risk to agriculture.”
The sentiment is one that has long been shared by trade analysts. And, in the context of US agricultural goods, it was most recently illustrated by a paper in the University of California’s Agricultural and Resource Economics update.
The research found that China has looked to South America and Eastern Europe for soy and wheat imports to make up shortfalls. And while imports of US almonds and pistachios have actually risen during the trade war period, they could have risen more substantially if it were not for the high prices Chinese consumers had to pay due to the tariffs.
With Sherrick’s confidence in US farmland unshaken by NCREIF’s Q1 results and GPs continuing to talk up the asset class’s uncorrelated credentials, something that has potentially been overlooked amid the lockdown frenzy may well become clearer as the year progresses: the US-China trade war could pose a bigger threat to US ag assets than that ever posed by the global pandemic.
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