A decade ago, we saw a significant shift in land ownership, where investors were buying up farmland across the country at a rapid speed. This was especially the case with institutional investors, such as college endowments, hedge funds and pension funds. Why?
The year 2008 marked the beginning of the U.S. financial crisis and our economy was plummeting fast toward the bottom. Farmland offered stable income in the form of rent and capital gains as the land appreciates in value. Additionally, financial investors were looking to mitigate risks by diversifying beyond the garden-variety stock and bond portfolio.
Farmland was a far better alternative for what was available in credit markets; it was an asset class that was tangible. Fixed income allocations, which large pension funds and endowments were mandated to include in their portfolios, had a historically low interest rate environment. In perspective, an average yield for U.S. government bonds had historically averaged 4.2 percent. In 2012, the 10-year government bond hit a record low of 1.39 percent. Beyond the United States, interest rates globally were hitting an all-time lows. In a search for yield, there was an appetite for alternative investment solutions since investors were not receiving the interest rates on bonds they normally would. That’s where farmland came in.
“Farmland financialization” gained so much steam that in 2013 publicly traded real estate investment trusts (REITs) came on the U.S. market to serve as an investment vehicle that catered to this phenomenon.
Since the 2016 election, interest rates have gradually been increasing (not yet to historical averages) but the forecast is a return to normalization in rates. I’ve been asked by many of our members if the ag land grab will continue. The answer is: perhaps.
The U.S. Department of Agriculture recently reported that U.S. farm real estate value (a measurement of the value of all land and buildings on farms) averaged about $3,140 per acre in 2018. This is up $60 per acre (1.9%) from 2017 values. Though values are on the up, if per acre farm land values begin to stabilize or soften, higher rates of return on investment grade fixed income could once again compete for institutional investable assets.
Here are some key factors that can impact land prices:
• Interest Rates: Just last month, the Federal Reserve announced that they will raise interest rates a quarter percentage point, to a range of 2% to 2.25%. That’s the third time they have hiked rates up in 2018. The Fed has also forecasted a continued rise in rate for the next two years.
• Crop Prices: REITs generate income by leasing its land to tenant farmers, but rents can slump when crop prices drop. The prices of our fruits, vegetables and nuts directly affect farmland value.
• U.S. Trade Policy: Trade tariffs and disagreements have become a critical factor in farm prices this year. For some specialty crops, exports are a large part of the agricultural market and any significant change in our trade markets will have a significant impact on farmland values.
• Farm Income: There is a direct correlation between land prices and income from farming and ranching. If farm debt increases, investors may feel that the price per acre is just too high.
Taking these factors into account, individual investors may be hesitant to continue to place big bets on agricultural land. Western Growers Financial Services will continue to keep a keen eye on the value of stocks and bonds, to learn if this farmland financialization trend will come back in full force. If you have any questions about corporate asset management or investment policy design in the meantime, please don’t hesitate to reach out to me at [email protected] or (949) 885-2379.