Agriculture markets began 2013 recovering from the severe drought of 2012 – one of the worst since the dust bowl days of the 1930's. The lack of rainfall impacted global agriculture prices; raising the cost of many crops to record highs, and decreasing the prices of livestock as ranchers liquidated their water-deprived herds. The weather turned more favorable during the course of 2013; timely rains, better seed genetics, and higher planted acreage produced what is expected to be a record corn harvest and an ample supply of soybeans and wheat. Consequently, crop prices dropped during the course of the year; corn, for instance, fell approximately 31% in 2013. The livestock industry recovered in 2013 as prices for meats improved and lower feed costs bolstered profitability. Other sectors in the agriculture industry, such as fruits, vegetables and nuts, also performed well during the year. Total farm income neared record levels in 2013, as crop insurance helped mitigate the vagaries of weather and production.
Market Inefficiencies Create Opportunity
The agriculture industry is very broad and diversified, both by geography and product, so that negative impacts in one segment may be offset by gains in another. Importantly, the sector is relatively inefficient and is still made up of family farms and production units. This allows the opportunistic agriculture investor to find and capture value.
One segment of opportunity that became available in 2013 is transitional properties – farms that are on the edge of development and usually located near highways or next to expanding population centers. Many banks have taken these farms back on their books as developers defaulted on loans since the housing crash. Finally, after five years of watching the value drop, banks have been moving to sell at prices significantly below recent values. For investors purchasing transitional farms, there is an opportunity to earn good agriculture returns, and if the development cycle returns, these properties will be sought by developers at premium prices. We expect this opportunity to continue into 2014.
We expect farm income to moderate in 2014 as ample supplies of crops will keep prices well below the averages of recent years. Lower crop prices and potentially higher interest rates will mute the appreciation of farmland in many areas, particularly in the corn-belt portion of the U.S. Consequently, for farms in this area, greater value will be driven by increasing the production potential of each property. Investment in irrigation, soil enhancement and drainage should produce higher crop yields that offset flat prices. In addition, the capital improvements in properties through infrastructure investing should enhance the value of the land and drive income higher.
Specific Regions and Crop Types Set to Outperform
Additional opportunities exist in 2014 for specific regions and crop types. We anticipate high returns for hard-shell nut producers this year, as nut consumption, both domestically and internationally, grows to record levels. The ability to export from California nut orchards is making that sector attractive. However, it is imperative to have adequate water resources to keep production viable. Rice production in the Mississippi delta region is another potential export in U.S. agriculture in 2014 and beyond. Farms in that region generally have adequate water, consistent yields and efficient means of distributing rice to domestic and international customers. Relative values for these properties should increase over the next year.
Overall, we look for more muted agriculture land appreciation and slightly lower levels of income in 2014 to produce moderate returns. However, there are specific opportunities available for the investor in certain sectors of agriculture that should enhance returns.
The information contained herein is for informational purposes only. It has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. Mesirow Financial is not making any recommendations with respect to any investment and nothing contained herein should be used for any investment decision. Past performance is not indicative of future results. Mesirow Financial does not render tax or legal advice. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s). Any offer can only be made, as appropriate, to qualified purchasers or accredited investors and only through the appropriate Offering Memorandum.