Agriculture and Farmland Market Outlook: COVID 19 Scenario ... · 30-04-2020 · Agriculture and...
Transcript of Agriculture and Farmland Market Outlook: COVID 19 Scenario ... · 30-04-2020 · Agriculture and...
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 1
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis
Economic/Policy Backdrop Market Dynamics Measures taken to combat the COVID-19 pandemic are likely to give rise to a
major economic correction worldwide in 2020, and the 2020 economic downturn
in the U.S. and globally may be one of the deepest on record. Even with the
passage and implementation of the CARES Act and the U.S. Federal Reserve’s
emergency provision of extra liquidity to the U.S. economy, forecasts as of April
23rd
for the Q2 2020 U.S. inflation-adjusted GDP range from -25 percent to -45
percent, SAAR.
U.S. Agricultural Sector The COVID-19 pandemic is already generating major headwinds for the key
drivers of demand for food, feed, fuel and fiber, in both domestic & export
markets.
Forecasts of U.S. GDP for Q2 2020 Real, Quarter/Quarter, SAAR (estimates as of April 23, 2020)
Forecast
UBS -25
Citigroup -28
Rabobank -31
JPMorgan Chase -40
Barclays -45
Source: Bloomberg, April 30, 2020
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 2
Domestic Demand Major setbacks in employment and the stock market have eroded consumer confidence and spending. In
agriculture, quarantines, working from home & social distancing are contributing to changing end-uses and
substitution among crops, and increased financial pressure on households & the overall economy will translate into
a reduction in demand for crops.
Especially vulnerable will be crops used for feed, fuel and fiber, while demand for food should be more resilient.
High-value food crops such as fruits and nuts are especially well-positioned, supporting the trend toward more
stable food demand.
Feed will be impacted by less demand for meat, with tighter household budgets and the shutdown of restaurants
and other food services. Biofuels will suffer from reduced travel and the collapse in oil prices. Fiber crops face
diminished demand due a sharp drop in apparel purchases. Lower petroleum feedstock prices have also made
biofuels and cotton less competitive than their petroleum-based substitutes.
The weakness in away-from-home and food service demand might persist beyond the easing of COVID-19
restrictions on socializing, as consumers remain wary of both gathering in public places and traveling. The
pandemic will likely accelerate the shift to online ordering and home delivery of groceries and meals. Another
potential medium-term effect could be a transition to more local food production, both at home and internationally,
leading to greater regional disparity in agricultural pricing.
Supply Chain Disruption
The spread and containment of COVID-19 have disrupted agricultural production and distribution. Border closures
and the suspension of new migrant worker visas have created uncertainty around labor-intensive farm activities;
and this may impact labor costs as well as worker availability. A reduction in transportation capacity, fewer workers
and a dramatic shift towards buying groceries and away from food service are inducing a number of short-term
supply chain shocks. Fresh, perishable products are particularly vulnerable to these supply chain disruptions,
leading to logistics and processing delays, as well as, reportedly, crops left to rot in the fields.
Agribusiness is struggling to adapt to this quickly shifting situation, resulting in reduced food service demand and
sharply higher grocery demand. Before the COVID-19 pandemic, most food spending in the U.S. happened away
from home. But with the sudden closure of restaurants, schools, hotels, and other food service channels due to
quarantines and social distancing, the supply chain originally put in place for these facilities is struggling to refocus
on consumer grocery, which involves different requirements for packaging, labeling and product mix.
Agricultural Trade
The degree of the impact of the COVID-19 pandemic on agricultural commodity exports will differ substantially from
country to country. Northern hemisphere agricultural farm product sales and exports primarily occur in Q4 and the
proceeding Q1, following harvest. Consequently, for U.S. and Canadian producers, the heaviest export season may
have occurred before the expected peak in COVID-19 cases in Q2 and Q3, when worker shortages due to illness
and fear of contagion will restrict shipping and port activity. By contrast, in the southern hemisphere, Brazil, a major
agricultural exporter, is expected to experience an overlap between the upswing in COVID-19 cases and the peak
crop-exporting season.
Looking Forward
Broad fiscal and monetary stimulus programs, along with support programs specifically targeting the U.S.
agricultural sector, will soften some of the negative impacts to agriculture caused by the COVID-19 crisis. The
CARES Act includes $19 billion in assistance for U.S. farmers, as well as funding for food assistance programs.
Low interest rates and increased credit availability for small businesses will reduce debt service costs and should
reinforce farmland values by shifting cap rates lower. Farm income will also benefit from reduced agricultural input
costs as a result of the sharp drop in energy and petrochemical prices, such as those for fuel, lubricants, electricity
and maybe fertilizer and certain agricultural chemicals.
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 3
As we emerge from the COVID-19 pandemic, record low interest rates and the U.S. dollar pulling back from current
highs should help reactivate the U.S. farm sector. Trade tensions and related tariffs between the U.S. and its major
agricultural customers have eased from their heightened levels in 2018 and 2019. However, in moving to a post-
COVID-19 new normal, performance will vary across regions and among crops, with improving prospects for some
segments offset by more intense competitive pressures for others. The agriculture sector will be able to adapt to
changes in supply chains, production costs and consumer habits, as farmers respond to price signals to adjust to
shifting demand.
Crop Price Outlook
Weak Q2 demand could result in the building up of higher inventories for a number of agricultural commodities
leading into the 2020 crop marketing year, which begins in late Q3.
With the prospect of higher inventories shadowing the market, agricultural prices are expected to move lower,
though the size of the retreat will vary significantly by crop. Corn prices, for example, have already corrected sharply,
dropping back close to the cyclical lows reached in 2016 and 2017, as this commodity contends with COVID-19-
related demand and supply disruptions, as well as major corrections in the demand and price for fuel ethanol. In
contrast, soybeans were already experiencing reduced margins prior to the COVID-19 crisis, and prices have limited
room to correct lower.
Compared to row crops, storable permanent crops have better price prospects in 2020. Storable, permanent crops
like apples and tree nuts, focused as they are on food end-uses, with no exposure to energy (corn), feed (soybeans)
or textiles (cotton), should fare relatively well from a demand perspective. Nevertheless, expectations of weaker
trade in 2020 will dampen the outlook for the price of both row and permanent crops.
Scenario Analysis*
Two scenarios have been developed illustrating potential pathways to resolve the health crisis and achieve an economic
recovery. Amid this fast-moving pandemic and the unprecedented policy responses, forecasting has become extremely
problematic and projections must be met with some skepticism. These scenarios are not meant to offer a best and a
worst case, but rather suggest a range of plausible outcomes, which we believe have a reasonable chance of
materializing. The scenarios involve assumptions based on current data, forecasts from a range of third-party analyses,
and the progress of countries that were early victims of the COVID-19 outbreak (China, Japan, Korea, Singapore and
Taiwan) and which are now in the process of restarting their economies, rolling back quarantines, re-opening shuttered
businesses, and easing travel restrictions.
(a) U.S. Baseline Scenario – V-shaped recovery
Economic and sector-specific assumptions
The U.S. will begin to emerge from stay-in-place measures in May. Return to normality will proceed in phases in Q3
as we see steady improvement in the incident rate of COVID-19. Ongoing improvements in the response to
incidents of COVID-19 (including monitoring, tracking, treatment and containment efforts) will reinforce the economic
recovery and add to its momentum. Large segments of the U.S. economy will approach normal functioning in Q4,
supported by the government’s massive fiscal and monetary stimulus.
At the end of 2020 and in early 2021, some sectors will still contend with obstacles in the supply chain (construction,
manufacturing, tech), weak offshore demand and increased international competition (agricultural and other globally
traded commodities), and some will face new consumption patterns (travel and entertainment, retail and commercial
real estate). However, in the first half of 2021, the U.S. economy will regain forward momentum with material gains
in employment as U.S. retail businesses reopen, consumer confidence rebounds, and international trade returns to
normal. Housing activity should benefit from historically low interest rates, deferred purchase decisions, and a dip in
home price appreciation. Agricultural prices should also benefit as consumer spending increases with a stronger job
market, and as trade and transportation rebound.
* The following is for informational purposes only. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee for future results.
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 4
Implications for farmland operating results and cash flow – Agricultural income will suffer from weaker pricing
in Q2 and Q3 of 2020, but should start to improve by Q4 just as 2020 harvests wrap up, with U.S. economic activity
ramping up and China’s economy in recovery. Agricultural 2020 export demand from the U.S. will likely be down
year-over-year by 5 percent to 10 percent, with a corresponding decline in agricultural commodity demand and
prices. By comparison, during the global financial crisis, U.S. agricultural exports for 2009 ($98 billion) were down
14 percent from 2008.1
Farm balance sheets have gradually weakened from several years of low commodity prices and a corresponding
increase in leverage. Farm assets reached $3.1 trillion in 2019, up 2 percent over 2018.2 Farm debt continued to
grow in 2019, approaching $416 billion – up 3 percent over 2018 – but the sector’s debt-to-equity ratio only rose
modestly from 15.3 in 2018 to 15.5 in 2019.3 In fact, while solvency risk has increased slightly in recent years, the
sector’s debt-to-equity ratio remains below the long-term average (1970 to 2018) of 18.2.4
Price implications for agricultural commodities – In response to the COVID-19-induced 2020 economic
downturn, agricultural prices will vary by crop, however in each case expectations have been lowered compared to
late 2019 forecasts, and crop yields remain a major driver of price. The baseline scenario has 2019 marketing year
corn price expectations slightly below last year’s of $3.61 per bushel, but potentially falling back towards the lows of
2016 and 2017, and little recovery in 2020, before recovering in the 2021 marketing year. Almond prices for the
2019 marketing year are expected to slide at least 3%, before rebounding for the 2020 marketing year, though
remaining below prior expectations due to potentially slower export demand as the global economy continues to
recover in Q4 2020 and Q1 2021. Prices for both crops are expected to return to near HNRG’s previously projected
long-term trend for subsequent years.
Prospective changes in property and investment values
Farmland values are likely to adjust lower, with predictions based on dampened expectations of future demand and
crop revenue, and increased perceptions of risk. This potential downward price adjustment, however, will be
moderated by lower interest rates as well as farm support programs. U.S. farmland values could move 3 percent to
5 percent lower in 2020-2021, with a more gradual slide for institutional-quality properties, before values recover in
2021 and continue to improve long-term. How much values decline in 2020 and 2021 will vary with the quality of a
property, though in general, row crop farmland may be more vulnerable than permanent crop farmland in the short
run.
(b) Pessimistic Scenario – U-shaped recovery
With persistently high infection rates, the intermittent emergence of new hot spots, and only marginal relief from
seasonally warmer weather, widespread U.S. stay-in-place protocols remain in effect well into Q3. Economic
recovery is hampered by a second round of infection in the fall and early winter of 2020, resulting in continuing
restrictions on travel, assembly and business activity, as well as further cautious consumer and business behavior
and only a sluggish improvement in employment.
The difficulties experienced by the U.S. in regaining economic traction are amplified by a disappointing response to
the COVID-19 pandemic in Europe and in developing and emerging economies; the result is a more extended
downturn in the U.S., along with a pronounced global economic recession. This U-shaped recovery, in contrast to
the V-shaped recovery envisioned in the Baseline Scenario, delays a robust bounce-back in economic growth until
mid-2021.
The extended nature of an economic downturn in the U.S. and abroad (assumed in the Pessimistic Scenario)
results in permanent losses in GDP potential and in-place manufacturing capacity and will call for additional
government intervention. Expanding federal and state deficit spending will set the stage for raising individual and
business tax rates, further dampening hope of future economic progress.
1 USDA Foreign Agricultural Service, Global Agricultural Trade System, accessed April 30, 2020. https://apps.fas.usda.gov/gats/default.aspx
2 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
3 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
4 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 5
A moderate but choppy recovery in the U.S. economy takes hold in the second half of 2021, marked by slow and
uneven upticks in the job market, as well as a more languid improvement in consumer and business confidence
compared to the Baseline Scenario. Despite low interest rates, agricultural demand remains below pre-COVID
levels, particularly for biofuels, fiber and other non-food crop products.
Implications for farmland operating results and cash flow – An extended economic lock-down will cause more
distress in the agricultural sector, with exports possibly dropping off precipitously by 15 percent to 20 percent. A
recovery in 2021 could still be relatively robust, as was the case following the global financial crisis. Revenues and
income for farmland owners would be negatively impacted, with the greatest swings experienced for those crops
with the highest price variability, such as fresh row and permanent crops. Depending on location, operating results
could fall between 10 percent and 25 percent.
Price implications for specific crops – In response to the COVID-19-induced 2020 economic
downturn, agricultural commodity prices will vary by crop, however in each case expectations have been lowered
compared to late 2019 forecasts, and crop yields remain a major driver of price. The pessimistic scenario has 2019
marketing year corn price expectations falling slightly below the lows of $3.36 per bushel reached in 2016 and
2017, in 2020, before recovering in the 2021 marketing year. Almond prices for the 2019 marketing year are
expected to slide at least 3%, before rebounding for the 2020 marketing year, though remaining below prior
expectations due to potentially slower export demand as the global economy continues to recover in Q4 2020 and
Q1 2021. As a food crop, almond demand is expected to remain more resilient than corn demand. Corn demand in
this scenario sees a longer recovery path to fuel ethanol use due to reduced commuting and business and leisure
travel. Prices for both crops are expected to return to near HNRG’s previously projected long-term trend for
subsequent years.
Prospective changes in property and investment values
Farmland values will correct downward, but the rate at which farmland prices decline would be slow, as sales activity
drops markedly and markets become more illiquid. Appraised values would trend lower, but likely find some support
in the lower cap rates on properties resulting from lower interest rates. In an environment of distressed financial
markets, investor interest in holding farmland as a long-term safe-haven asset should increase and offset some of
the downward pressure on farmland values. Farmland prices under this Pessimistic Scenario could decline by 5
percent to15 percent in 2020-2021, depending on location. Row crop farmland may be more vulnerable, as fuel, feed
and fiber demand slow down more than food demand in 2020.
Although farmland income and values may temporarily move lower in either scenario, we don’t anticipate long-term
impairment to the asset class, as we see demand for agricultural products rebounding more rapidly than many other
sectors of the economy.
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 6
HNRG Research Team Court Washburn, Ph.D
Senior Managing Director,
Chief Investment Officer
Keith Balter
Managing Director,
Economic Research
Mary Ellen Aronow
Director,
Forest Economics
Daniel V. Serna
Associate Director,
Senior Agricultural Economist
Elizabeth Shestakova
Economic Research Analyst
Weiyi Zhang, Ph.D
Senior Natural Resource
Economist
Important Information A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio perfor-mance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political,
regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange
rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider
the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdic-
tions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on
market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife
Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising
from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future
events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements con-
cerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect
loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to
be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek profession-
al advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal
advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, profes-
sional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is
no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee
returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise
specified, all data is sourced from Manulife Investment Management.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset man-agers from around the world through our multimanager model. Hancock Natural Resource Group Hancock Natural Resource Group, Inc. is a registered investment adviser and part of Manulife Investment Management’s Private Markets platform. We specialize in global farmland and timberland portfolio development and management on behalf of our investors worldwide. Our timber division manages approximately 6 million acres of timber-land across the United States and in Canada, New Zealand, Australia, and Chile. Our agricultural investment group oversees approximately 300,000 acres of prime farmland in major agricultural regions of the United States and in Canada and Australia. These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeim.com/institutional. Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil
Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited,
Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European
Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife
Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Lim-
ited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M)
Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation.
Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong
Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United States: John Hancock Investment Ma-
nagement LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Viet-
nam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance
Company and are used by it, and by its affiliates under license.
515152