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Geopolitics affect agriculture investments

Brett MacNeil for Progressive Forage Published on 27 February 2018
Geopolitics agriculture invetments

Headlines highlighting global geopolitics are increasingly becoming a concern for ag operators, ag investors and the network of vendors who sell products and services in our industry.

Without any doubt, our domestic markets are dependent on exports, as we produce far more than we can consume with growing productivity and increasing reserves. Access to offshore markets and their acceptance of our products is the key driver in both short- and long-term farm profitability.

For those of us invested in ag domestically, as operators or farmland investors, despite recent industry financial strains and adjusting land values related to commodity price declines, we are in the most stable, productive, sustainable and safest region of the world.

This stability, combined with highly developed infrastructure and markets, pursuit and general acceptance of technology and ready access to capital, means the U.S. agriculture sector will continue to contribute more and more to the global food market.

It may be difficult to see, much less plan for, the longer term since we are currently working through another short-term down commodity cycle. But there are clear signs of stability, if not recovery, and more importantly, the ag industry is set up for a long-term and very positive trajectory due to many factors – increasing global demand for high-quality food and protein perhaps the most influential.

Think globally

When I think of geopolitics, I think “uncertainty,” and when I think uncertainty, I also think “opportunity.”

Names and labels like Putin, Brexit, disruption, negative interest and Kim Jong Un are in the headlines today, but how do these international stories affect agriculture in the short and long term, and what can we control versus manage?

  • Import/export markets: Food demand is outpacing production in a number of geographies. Most of the countries outside Australia, the E.U., North America and South America are not food self-sufficient and, as such, are net importers or will soon become so. But free and open trade is dependent on the politics of individual nations.

    The actions of foreign governments, dictators and their positioning can have a significant effect on the health of our industry. While we cannot control these politics, we can and should develop contingency plans, conserve cash or align with capital/debt sources and balance our risk by seeking to supply less volatile and politically unstable markets to balance out involvement in the more volatile areas.

  • Demographics: The U.S., India and New Zealand have stable demographics. China, Russia, South America and most of the European countries have a bulging mature population and a shrinking up-and-coming productive population. Japan and Italy are decades ahead of this curve, with negative population growth. With fewer workers (and more consumers), there will be less capacity to produce food – providing an opportunity for off-shore providers, in particular American growers.

According to the World Bank, although China has lifted over 800 million people out of poverty since 1981, 360 million (27 percent of its population) live on $3.10 per day or less. For India, the number is 805 million (58 percent) living on $3.10 per day or less.

These huge groups of low-income workers all want their shot at their version of the “middle class” and a better diet. This is a wave we can ride, and one incredibly positive for U.S. producers, as China and India may not be able to increase food production capacity to pace the increase in middle-class families.

  • Geography/logistics: The countries that compete with the U.S. on a productive basis, meaning they have the landmass with productive soils and conducive climates, often are constrained logistically and have significant geographical and infrastructural barriers in efficiently getting their crops to consumers. Only Australia, Argentina and the E.U. have the seaports and internal transportation infrastructure to get millions of tons of product to external markets.

  • Energy: The world used to be highly dependent on oil from the Middle East. But the U.S. is now energy self-sufficient and, with the increase in alternative energy sources like wind and solar energy, costs should remain stable if not decline. This provides U.S. agriculture a tremendous advantage in shale, diesel and nitrogen costs, which equate to the lowest energy costs of any of our key competitors.

  • Civil and economic unrest: Russia, China, the E.U., the Middle East and Africa have all seen civil and economic unrest – even wars – in the recent past. We, on the other hand, have not been engaged in national unrest or war on U.S. soil since the Civil War.

    Russia is increasingly aggressive toward its neighbors, China is, well … no one really knows for sure, and large parts of the Middle East and Africa have been through recurring short-cycle disruptions throughout modern history. Only the most risk-tolerant investors or most needy sovereign nations are making investments in Russia, Africa and China. As a result of this unrest and dire outlook, there is an enormous amount of capital fleeing these geographies looking to place money in the safe havens outside of the turmoil.

  • Competition: After considering all of these factors, it is comforting to know our only real, sustainable, stable competition considering unrest, politics, geography and demography are Australia and Argentina. They have the cost structure, logistics and resources to effectively serve the burgeoning global demand for food and feed.

But as instability, population growth and energy costs increase around the world, we should find we are competing less with these regions, as the demand is positioned to well outpace supply, helping all three export markets grow. Individual operators looking for an edge need to be thinking about their next strategic move to capitalize on this trend.

While awaiting the next boom cycle, we can continue to focus on efficiency in operations, alliances with investors and develop organizational cultures that embrace change while remaining flexible enough to participate in both short-term fads and long-term trends.

Looking forward

The last decade has been a boom to agriculture, with massive improvements in all areas. However, since about 2014, with declining commodity prices and resulting flat to declining capital appreciation, ag investor appetite has waned.

Some private and institutional investors have slowed their commitments to ag, seeking better margins in other markets while others have found an ability to stretch their risk tolerance moving downstream or lowering their return hurdles.

More recently, however, we are starting to see an uptick in interest from these groups as commodity markets stabilize through continued growth and evolution in consumer demand, especially healthy food groups, transparency and traceability, and the increasing, almost seemingly infinite population curve.

Investors, while evolving their business plans, are again increasing their allocations to this asset class and looking for operators to work with.

In the production side of the business, we have the opportunity to reset our barometer, revisit our growth, succession, capital structure and marketing plans while preparing for the next two decades – which I predict will be as good or better for the U.S. farm landowner and operator than the prior two decades, albeit likely more volatile along the way.

Notably, since the mid-’90s, we’ve seen more and more public and private capital attracted to farmland and, to a lesser extent, ag tech and ag mergers and acquisitions over the last decade.

Consider that in 2005, there were less than 40 investment funds focused on farmland and, today, that number is often quoted in excess of 250 – a sixfold increase.

The increase in interest from the investment community is due in large part to access to statistically reliable historical data with which to underwrite investments in this alternative asset class. The U.S. ag market continues to provide stability and is poised to provide increasing returns in the coming years.

The key for U.S. operators will be to develop and be prepared to implement contingency plans to weather the short-term down cycles while riding the long-term trend. Success, of course, favors the prepared, and a well-defined strategy executed with discipline is the key precursor.

Whether your business plan is based on diversification or specialization, you must decide on a strategy and commit to executing it.

For instance, at roughly the same time we saw record corn and soybean prices, we saw record hay prices, and today, much like other commodities, we are hovering near breakeven prices.

Those disciplined farmers who saved or re-invested their profits in downstream pellet mills or hay presses are in a better position during the down markets and have increased their flexibility as well as added value and increased alternatives to what many would consider a very specific and narrow commodity play.

Farmland will continue to attract private and institutional capital, but at a slower pace in the short term. Nonetheless, the growing number of potential investors and increasing allocation to investments in ag offer producers an attractive tool to include as part of both your strategic growth and contingency plans.

Access to capital is better today than yesterday – and a lot better than it was in the 1980s.

Farmers will increasingly be able to farm the ag investor more effectively in the coming decades as a tool to growth and risk mitigation.  end mark

ILLUSTRATION: Illustration by Getty Images.

Brett MacNeil is the President and CEO of Scythe & Spade. Email Brett MacNeil.

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