Historical evidence suggests that the performance of select agricultural sector assets is uncorrelated with traditional markets and at times has shown to be less sensitive to periods of economic contraction. The “great lockdown” of 2020 – the ultimate stress test for almost all asset classes – has provided an opportunity to access how the sector responded to our nation’s first recession in almost 30 years.
World trade of agricultural products resilient versus total merchandise trade
Global trade of agricultural products was unchanged in the first quarter of 2020 and fell 5 per cent in 2Q20. This compares to falls in world merchandise trade of 6 per cent and 21 per cent respectively, according to the WTO.
The resilience of agricultural trade relative to merchandise trade, as reported by the Food and Agriculture Organization of the United Nations, is considered the result of (among other things) food being an essential good, its relative inelastic demand, the constraints to replacing food imports through domestic production and the high degree to which agricultural trade takes place in bulk shipments.
Importantly for Australian agricultural exports to Asia, despite the contraction in incomes in key economies over 2020 (we know the forces of population growth and income growth significantly influence total food consumption), incomes of most major trading partners remain above 10-year average levels according to the latest data from the Department of Agriculture, Water and the Environment.
Higher at home food expenditure
As we’d expect and as we now well know, household spending on food for consumption at home increased during COVID-19. However, durable (generally defined as goods that have utility over a long period of time and can range from toasters to cars) and non-durable goods (essential products including food) consumption during 2020 was not entirely consistent with trends during past recessions.
In a 2010 publication titled Durable Goods and the Business Cycle, the RBA identified that “during deep recessions, spending on consumer durables and capital goods in Australia has fallen sharply. In contrast, growth in household spending on non-durables and services slows on average but remained positive. The experience in the United States has been similar.”
While food spending (non-durable good) in Australia increased in 2020, so did spending on furnishings and household equipment (durable good) – breaking from historical precedent.
Agricultural commodity prices outperform
Given the historical resilience of non-durable goods during periods of economic contraction, it is not a surprise that agricultural commodity index returns outperformed the global commodity benchmark index (per S&P GSCI) returns across 2020. Closer to home, Rabobank’s Australian Rural Commodity Index, a measure of local farm gate prices, finished 2020 above year-earlier levels but below peak levels reached in March 2020.
The lockdown pillars of resilience
As we are long-term investors in real assets, we are not overly concerned by short-term trends and daily movements in equity markets. However, we recognise they provide a barometer of trends and sentiment in the market and at times the general economy.
As highlighted by the Federal Reserve, healthcare and consumer staples stocks (including Archer Daniels Midland, Hormel Foods, Hershey Foods, Kraft Heinz, Tyson Foods, General Mills among others) fared well during COVID- 19 and were much more resilient than the hardest-hit sectors of energy, financials and industrials. When it comes to private market agricultural assets, asset value resilience throughout the “great lockdown” is clear to see.
Considering agricultural exposures in your portfolio
It would be wrong to say the agriculture sector escaped the impacts of COVID-19 totally unscathed.
Restaurants and by implication supply chains and commodities reliant on restaurant trade have seen a sharp and dramatic fall in sales. Products relying on air freight (particularly seafood) have experienced similar challenges while trade and labour shortages have been ongoing features globally.
We are well aware that COVID-19 continues to create challenges across the globe. However, to date private market asset values, household food consumption, global trade, commodity prices and public market consumer staples index demonstrate the resilience of the sector in the face of one of the deepest economic recessions in recent times. In fact, the greatest influence on Australia’s agricultural prospects during 2020 was not COVID-19 so much as the return of more favourable climatic conditions.
At Riparian Capital Partners, we expect the resilience of the agriculture sector during 2020 to be yet another driver for the continued, and in some cases accelerated, institutional capital allocation into private market agriculture sector assets that are critical to the production of essential goods – water, farmland, agricultural infrastructure and agribusinesses.
Patrick Hayden, managing partner, Riparian Capital Partners
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