Pessimism among farmers and land buyers as trade war rages

After the largest ever one-month drop in agricultural producer sentiment, the 'top 20 wealthiest families' are best placed to hunt for bargains, an insider says.

Trade-related uncertainty is dragging down sentiment among agricultural producers and making institutional buyers of US farmland cautious, according to market observers and participants.

Earlier this month, Purdue University and the CME Group reported that July saw the largest one-month drop in the three-year history of the monthly gauge of agricultural producer sentiment. The pair wrote that measures of sentiment regarding both current conditions and future prospects led to sharp drops last month that brought the cumulative score to 117 – an almost 20 percent decline from the reading of 143 reported in June.

Set on a scale that compares current conditions with a baseline of those between October 2015 and March 2016, the report is based on a survey of 400 agricultural producers, with a reading above 100 suggesting an improvement and a score below 100 reflecting deterioration.

“Respondents indicated that many farms are already feeling the impact of reduced ag exports, as 70 percent of producers said they expect reduced net income as a result of the trade conflicts,” wrote Purdue and CME. “The weak ag economy outlook led producers to have a more pessimistic view of farmland prices in the year ahead in addition to providing them with a more negative perspective on making large farm investments.”

No cushion left

Shonda Warner, managing partner at Chess Ag Full Harvest Partners, an asset  management firm headquartered in Kansas City, Missouri, told Agri Investor that it appears uncertainty surrounding the trade war has also inspired a “wait and see” approach among institutional buyers in US farmland markets, though opportunities remain. Warner said that, although many farmers expect institutions and the least-levered among their ranks to be the most active buyers in the near term, she thinks other buyers are more likely to benefit.

“It’s going to be some of the wealthiest families in America – maybe the top 20 wealthiest families in America or globally – that are going to get the bargains here,” she said. “International LPs might be thinking that there could be some bargains in the US.”

The financial stress reflected in the Purdue/CME report relating to continued weakness in commodity prices has been exacerbated, according to Warner, by steel tariffs that have begun to increase equipment costs for ag-related manufacturers and processors.

“When everything fell off the cliff in 2012 and 2013, people had some cushion from having four or five good years,” Warner said. “Now, there is no cushion left. There is not much to fall back on. For many people, we are below the cost of production on soybeans and the basis is terrible because nothing is moving.”

Although that financial pressure may be making more farmers open to sale/leaseback transactions, Warner said her firm eschews the deal structure in its own farmland investments. Because they are often entering into such agreements for cashflow reasons, in some cases, farmers act as if they still own the land and limit an investor’s ability to guide management of the property.

“I call them embarrassment sales; very quiet, no broker, people don’t want anyone else to know that they’ve moved XYZ land, and yet they’ve moved XYZ land,” Warner said. “Those sales are happening and will continue to happen this fall.”

Unfortunately, Warner added, another consequence of the trade war has been that it has diverted attention from developments that might otherwise be providing support to market sentiment.

“Other than soybeans, you see some positive movement in global stocks going down,” she said. “Absent this trade war, I would, maybe, be starting to feel better about the market, but everyone is just afraid so it feels a little bit like not much is going on right now.”