Recently, the National Council of Real Estate Investment Fiduciaries (NCREIF) released its first-quarter 2020 results of the NCREIF Farmland Index, a widely relied-upon tool that includes data gathered from investment-grade U.S. farm properties. NCREIF uses the data to provide tools to institutional investors, giving them the ability to identify investment risks in the space, and the index has been increasingly recognized and referenced by the both the academic and investment communities as the bellwether source of metrics for tracking and analyzing the asset class and its performance.
According to data, the total return for the first quarter was -0.10%, down from +2.34% the previous quarter and +0.70% in the first quarter of 2019. It’s worth noting, this is the first time since the fourth quarter of 2001 that the Farmland Index posted a negative total return, comprised of a 0.38% income return and appreciation of -0.49%. However, annual cropland outperformed in Q1, posting total returns of 0.66%, with cropland appreciation of -0.27% and annual cropland income of 0.93%. What’s important to note is that while these numbers revealed a negative total return for the Index, when compared to the performance of other indices, they are reflective of the strength of farmland as an asset class amid incredible volatility.
When you glance across the Dow Jones, Russell, QQQ, and S&P, you’ll find Q1 losses of -23%, -20.9%, -10.29% and -19.6% respectively. In addition, the Commodities Index posted a sharp decline of -23.3%, and Nareit, an index tracking U.S. real estate investment trusts, saw earnings decline across all REITs by -9% for Q1. Amid the current disruption to the economy, experts predict farmland values will remain steady thanks to low-interest rates, high rents, and limited inventory for sale. On top of that, the CARES Act, which includes $19 billion in financial assistance to U.S. farmers, food assistance programs, the contraction of the U.S. dollar, and broader access to credit for small businesses, are all expected to bolster growers income this season, thanks to lower input costs and a drastic decline in energy costs.
Bottom-line, for all of us sitting around waiting for farmland prices to brake aggressively before we become a buyer, I’m not thinking it’s going to happen anytime soon on a broad scale. Yes, row crop prices are terrible and livestock producers are struggling but interest rates are near record lows and available inventory is limited. In my opinion, this is not a recipe for a big break. I did hear of a few auctions on some dryland ground during the recent lockdown going as a “no sale” with “no bids”. But until the Fed starts to show signs of pushing interest rates aggressively higher and more banks start to pull farmer funding I don’t see a massive drop in farmland values. You can read more details in the NCREIF report HERE.