Two Black Swans
In case you aren’t familiar, ‘black swan’ is a metaphor used to describe an event that comes as a surprise, has serious implications and is loosely rationalized after the effects have played out. With the way things are looking in the face of the coronavirus, it might be safe to say that we are going to get used to seeing a lot more black swans than usual.
In late February I presented to a large group of real estate investors and stated that “agricultural land would see only slight to modest appreciation for the foreseeable future.” Given how market conditions have changed since then, we can safely say that I was wrong. We live in a completely different world today than when I gave that assessment eight weeks ago, and much like the 2008 financial crisis, many things will necessarily evolve. While the 2008 crisis could be described as a financial breakdown that undermined our economy, what we are dealing with today is the inverse. Now in April of 2020, we are well into another program of quantitative easing. In both cases, quantitative easing attempts to be a stop gap solution reaching out to hold the invisible hand of the free market economy in the hopes that the future can be influenced for the better. Both cases of QE were spurred by an unexpected crisis, and like it or not, we will be dealing with the outcomes of these most recent interceptions in the coming weeks and beyond.
Understanding Quantitative Easing
The premise for my belief that agricultural land would see only slight to modest appreciation in the short term was based on forecasts made near the beginning of the year. At this time it was projected that the dollar would remain strong and short term increases in net farm income was looking relatively weak. All of this was before the Federal Reserve embarked on a $700 billion (yes Billion) dollar quantitative easing program to help stabilize the economy. As you may know, QE can be controversial at best and has to be done with a level of precision that can be hard to qualify since it’s largely built on a series of (very) educated guesses and predictions. Quantitative easing attempts to stabilize and stimulate the economy by injecting liquidity into the markets through increased monetary supply. Specifically, this can occur by the US Federal Reserve purchasing assets such as treasury bonds and mortgage-backed securities, increasing their balance sheet. This increase in monetary supply historically has devalued currency, or the US Dollar in this case, making exports more attractive. This is not necessarily a negative consequence, but one of the many considerations the Fed attempts to manage through their actions.
Quantitative Easing in the Ag Industry
When we look back over the last 15 years—or even further—the greatest appreciation in farmland values occurred between 2008-2014, which is precisely when the US Federal Reserve had an active quantitative easing program in place coming out of the recession. Agricultural exports increased due to the devalued dollar making US goods more affordable for other countries, which resulted in increased net farm income. (There is a direct correlation between net farm income and the underlying value for farmland.) Another direct consequence of quantitative easing and increased monetary supply is more money chasing the relatively same number of investments. In times of volatility, people look to relocate funds into less volatile alternative investments, such as agricultural land. Even though this played a less impactful role in farmland appreciation over this period, it’s still relevant enough to note.
Will 2020’s QE Be Different than 2008?
Will the effects of quantitative easing this time around be different than that of 2008-2014? Yes, likely. Market conditions are different both domestically and abroad, as well as the sources of strain on the underlying economy. In our current situation, the dollar is predicted to remain stronger, even with the increase in monetary supply due to the US dollar’s attractiveness as a safe(r) haven compared to other countries or currencies for international funds. While this projected increase in investment in the US may counteract some of the effects an increase in monetary supply will have on the value of the dollar, it will also likely result in an additional increase in liquidity in the markets seeking stable returns. Agricultural land investments remain attractive given their low volatility in the current market and valuations that have little or no correlation to equity markets.
Ag Outlook after QE
Ultimately what does this mean for agricultural land values? I’ve been wrong before, but if history repeats itself as it is wont to do, the current program of quantitative easing coupled with increased investment in the US is likely to result in an increase in appreciation rates for agricultural land over the next few years. This will look different than it did in the past, but will have similar consequences. With land prices remaining low and strong farm performance in the present market due to current food demand, the long-term outlook on investing in agriculture remains extremely positive.