FARMLAND MARKETS: PROFITABILITY AND FUTURE PERSPECTIVES. Dr. Tim Hopper Managing Director and Chief Economist, TIAA-CREF

Transcription

1 FARMLAND MARKETS: PROFITABILITY AND FUTURE PERSPECTIVES Dr. Tim Hopper Managing Director and Chief Economist, TIAA-CREF

2 FARMLAND MARKETS: PROFITABILITY AND FUTURE PERSPECTIVES 10 Global Dynamics that Influence Farmland Values Tim Hopper, Ph.D. Chief Economist, TIAA-CREF Wednesday, November 13, :00 3:30 p.m. Hilton Garden Inn, Champaign, IL

3 Ten global dynamics that make your farm worth what it s worth 10. Global Population Growth

4 10. Global Population The good news: Population growth will not outstrip our ability to supply food The bad news: There will be cycles where demand growth will create shortages along the food chain Stable population growth is only half of the story Where is standard of living growth in relation to population growth? The distribution of population plays into the mix The shift from starches to proteins stresses the system Capital investment is always slow on the uptake

5 Ten global dynamics that make your farm worth what it s worth 10. Global Population Growth 9. Global Trade

6 9. Global Trade The world economy growing at an accelerating pace since 1970 World GDP up more than 300% in constant dollar terms. Global trade up more than 50-fold WORLD GDP Nominal (in $ Billions) WORLD TRADE in $US Billions $80,000 $20,000 $70,000 $60,000 $50,000 $18,000 $16,000 $14,000 $12,000 $40,000 $10,000 $30,000 $20,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ $ Source: World Bank Source: World Trade Organization

7 Ten global dynamics that make your farm worth what it s worth 10. Global Population Growth 9. Global Trade 8. The Rise of China

8 8. The Rise of China Second largest economy, 1.3 Billion citizens, 6% of the world s land mass, 6% of its water Main forces during the past 20 years: urbanization, industrial development, industrial productivity Main issues for the coming 20 years: pollution, water and food safety, rural development, education Knowledge Transfer: Smithfield, Ukraine, Brazil

9 8. The Rise of China

10 Ten global dynamics that make your farm worth what it s worth 10. Global Population Growth 9. Global Trade 8. The Rise of China 7. Wine

11 7. Wine The $4.99 for a box of Gallo revolution Acreage has doubled in the past 20 years for high value crops with row crops taking the brunt of the shift Wine consumption is growing at 14% annually in the US, 4% globally

12 Ten global dynamics that make your farm worth what it s worth 10. Global Population Growth 9. Global Trade 8. The Rise of China 7. Wine 6. Regulation

13 6. Regulation RFS the global phenomenon Restrictions on foreign or corporate ownership Banking Regulation: Dodd Frank Basel III

14 Ten global dynamics that make your farm worth what it s worth 5. Foreign Exchange Rates

15 5. Foreign Exchange Rates Capital is distributed unevenly around the world In all countries, all assets (including farmland) compete for (foreign) capital Rising dollar environment: the payback to land is lower Falling dollar environment: The payback to land is higher

16 5. Foreign Exchange Rates What effect does a Dollar depreciation have on farmers? (late 2000 s cycle with high commodity prices and a falling dollar) US farmer: stronger commodity prices raise profits and the higher income stream implies higher rents and land values Foreign farmer: High commodity prices offset by strong domestic currency. Lower income stream lowers the return component of land values, but raises the exchange component of land values. On net, land increases

17 Ten global dynamics that make your farm worth what it s worth 5. Foreign Exchange Rates 4. Shale Energy

18 4. Shale Energy The US is now the largest producer of oil and gas in the world. The list of knock on effects is long: Trade balance Corporate cost structure/employment base Distribution of incomes favors the US Fuel substitution changes the usage mix and reduces traditional gasoline consumption

19 Yield (%/yr) 3. Interest Rates Yield Curve through time Fed H.15 dataset

20 Ten global dynamics that make your farm worth what it s worth 5. Foreign Exchange Rates 4. Shale Energy 3. Interest Rates

21 Ten global dynamics that make your farm worth what it s worth 5. Foreign Exchange Rates 4. Shale Energy 3. Interest Rates 2. Wall Street

22 2. Wall Street Agriculture is historically one of the most undercapitalized sectors in the global economy. Capital investment is generally lumpy and unevenly spread between regions and through time. It does not always match demand. Capital allocation is often related to alternative asset returns, interest rates in addition to crop demand. If farmland were a tradable stock on a market, what would a unit of farmland be worth? Solving the equity puzzle will solve many of the capital allocation problems we have today. Commercial RE is a prime example of a more efficient capital market.

23 Ten global dynamics that make your farm worth what it s worth 5. Foreign Exchange Rates 4. Shale Energy 3. Interest Rates 2. Wall Street 1. Water

24 1. Water Water Resources Water Use 2% 2% 1% 54% 13% 10% 7% 7% 6% Brazil Russia Canada US China India ROW 48% 13% 14% 20% 3% Source: World Bank, 2011

25 Top 10 List of Global Dynamics that make your farm worth what it s worth