Considered a safe haven investment, farmland has proven to be a reliable store of value in times of economic tumult – a source of attractive income that is uncorrelated to other diminishing sources of fixed income, such as 10-year US treasuries.
As the spread of COVID-19 accelerates, the corresponding impacts on governments, companies and individuals are fluid and unfolding rapidly. As a result, it is difficult to predict potential outcomes. It is, however, reasonable to assume that the longer there are restrictions on the movement of goods and people, the larger the negative impact will be on the global economy. Financial markets are responding to the limited visibility by retreating towards safe haven investments, such as US treasuries (where yields have declined below 1 per cent), gold and historically safe haven currencies (e.g. the US dollar).
Historically, farmland has been uncorrelated to the economic cycle and does not experience the same volatility as broad financial markets and traditional asset classes. We do not anticipate that farmland will behave substantially differently to current market conditions than it has to analogous conditions in the past. However, currencies and their influence on unrealised appreciation in Westchester’s global funds could influence returns and volatility. US dollar strength resulting from the aforementioned flight to safety is resulting in considerable weakness in select non-US currencies, including the Brazilian real.
There are concerns that further spread could jeopardise food security; however, there is no current evidence to validate this concern. Although other pandemics, including SARS, the avian influenza and MERS, led to an inflation of food prices, COVID-19 is not yet causing food shortages or price hikes. Not even in China, where some stress has been reported in poultry and pork supply chains, but food supplies overall have remained adequate. Prices for staple crops (like wheat, maize, and rice) have remained stable since the outbreak and, during February, world market prices for wheat and maize softened. While the price of rice was slightly up by 1 per cent, none of the observed fluctuations seem related to the coronavirus outbreak. More broadly, historically, economic slowdowns have not materially impacted demand for basic food commodities, such as corn, soybeans, wheat and rice.
Where COVID-19 is having an impact on the agriculture sector, however, is via supply chains and consumer purchasing patterns. At the moment, three clear changes to consumer trends and supply chain management have become apparent as a result of the virus – the following are the changes and corresponding potential impacts on the agricultural sector.
First, in locations where COVID-19 is most widespread, consumers have responded by eating at home rather than in public locations (e.g. restaurants). This change in consumption behavior will likely have a negative impact on traffic at restaurants and benefit food delivery companies and supermarkets. More basic ingredients are utilised in home cooking compared to restaurant-prepared meals, thus more expensive and niche products are likely to experience reduced demand and corresponding price softening. In China, for example, consumers typically consume beef, lamb and seafood at restaurants; as a result, import demand for these products from China has softened substantially in the first two months of the year. Meanwhile, demand for pork and chicken remains strong as these meats are utilized in home cooking. Global impacts could vary depending upon the aggregate impacts of local and country nuances.
Secondly, global industries are reacting to COVID-19 and diminished labor force availability by reducing operations or shuttering production, the ensuing transportation bottlenecks will likely impact the entire global food and agricultural supply chain. This could lead to a reduction in supply of basic commodities. For example, if meat producers are unable to source sufficient feed (due to lack of transportation or reduced oilseed crushing volumes), they will need to reduce production by reducing herd sizes. This could result in a medium-term negative impact on feed demand until producers are able to rebuild their herds.
The availability of labor could also impact slaughter and meat processing facilities and milk processing plants causing further supply chain disruption. A slowdown in manufacturing and freight issues will over time have an impact on crop input and machinery part availability. Current timing with pending seeding of spring crops in the Northern Hemisphere and winter crops in the Southern Hemisphere mean that most materials for immediate use are already ready on farm.
Lastly, wine consumption is an area that does experience a strong correlation between consumer sentiment and economic activity. This tends to be more pronounced at higher price points. Westchester’s wine grapes are often found in the mid-tier, $20 to $30 per bottle segment. Although impacts could reach into the mid-tier, impacts on demand in higher price segments will be a harbinger of impacts on mid-tier priced products. Therefore, a wait and see approach is prudent before prognosticating on impacts to Westchester’s viticulture holdings. It is worth noting that the majority of wine produced in California is sold within the US, reducing the impact of possible export-related bottlenecks and the impact of foreign currency movements on demand for US goods.
We don’t anticipate that COVID-19 will negatively impact short-term farmland values. If supply chain disruptions cause dislocations in commodity prices (i.e. commodity prices fall), the ultimate impact on land values will depend on whether the market views this dislocation as temporary or protracted. If viewed as temporary, farmland markets would not price in lower commodity prices; if longer term, lower commodity prices could be reflected in farmland values (all else equal). However, the negative impact on farmland values would likely be offset by lower interest rates, with central banks around the world strongly considering or actively implementing monetary stimulus measures.
Lower commodity prices and broad uncertainties could impact farmer sentiment and their outlook on 2021 income potential; however, at least in the US row crop portfolio, rents have already been negotiated and paid for the 2020 season and much is yet to be seen on how the current situation unfolds before expectations are appropriate to set for 2021 rents.
Across the current portfolio, land values are likely to be most negatively impacted in the viticulture complex. We have already witnessed strong price appreciation resulting from a healthy labor market and favorable consumer sentiment. If these trends reverse, we can expect them to have correspondingly opposite knock-on effect on viticulture land values. If we look back to the 2008 financial crisis, viticulture farmland values were flat in 2009 (+1 per cent), down by 6 per cent in 2010 and then appreciated between 2.5 per cent to 9 per cent per year up to 2018.
Martin Davies, CEO and president, Westchester Group
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