The ongoing U.S.-China trade war and harsh seasonal weather patterns in the Midwest have exacerbated fundamental headwinds in the agricultural economy and have begun to significantly hurt farm operators' profits, and some pain will be felt by landowners, Farmland Partners Inc.'s leadership said Aug. 7.
The trade war has particularly hurt higher-value nut crops such as almonds, pistachios and walnuts, which are viewed as "somewhat luxury" expenditures in China, Executive Chairman, President and CEO Paul Pittman said on the real estate investment trust's second-quarter earnings call.
Still, land values have continued to appreciate as a result of the overall shortage of farmland, which will serve to offset some of the pain, Pittman said.
"This is what a downcycle looks like for a farmland investor. ... The recent announcement of no more ag products to China from the U.S. is certainly not good news, but fundamentally U.S. production agriculture will weather that storm," he said.
Farmland Partners shares were up more than 10% in Aug. 7 trading.
Pittman said the cycle of flooding, excess rain and drought in 2019 has particularly hurt the U.S. corn and soybean crop, although the results so far are so uneven it is difficult to measure "how bad things will turn out to be." He estimated that the year's crop of corn and soybeans will fall far short of expectations, likely resulting in higher commodity crop prices.
"What we're seeing in the commodities markets on the Chicago Board of Trade today, though, is a recognition of the difficulty of judging the size of this crop, balanced against the demand destruction occurring from the trade war and the demand destruction occurring because of increased crop prices," Pittman said. "I think in the end, the supply-side shortage will dominate the markets and it will be bullish for corn and soybeans, but there's certainly no certainty."
The company's farm operator tenants so far are performing "reasonably well" this year, and they will survive financially because they have crop insurance, he said.
"The farmers, frankly, need to see some price increase come their way," Pittman said. "They have had multiple years of surplus, which has depressed prices. I think, while painful for individual farmers, a short crop year will for the industry as a whole turn out to be a reasonably positive thing."
Pittman cited the recent appreciation in farmland values as a central and ongoing positive to the farmland investment thesis. Farmland values ticked up 1.94% from June 2018 to June 2019, according to a recently released U.S. Department of Agriculture land value survey. Within the 17 states Farmland Partners operates in, values increased 2.66%.
"There are few industries where you can be at this place in the market cycle and still be able to sell assets at substantial premiums," he said.