Agricultural Finance
Agriculture Market Insight
The State of Agriculture–Spring 2016
By: Hugues Rinfret, CFA, FRM and Eric Rama
The global economic outlook has weakened, but our outlook for the consumption
of major agricultural commodities remains strong.
The International Monetary Fund lowered its global growth forecast to 3.4% for 2016,
which is well below the 4% trend line. China is the main culprit of the slowdown
with an expected growth rate of 6.3% in 2016, the slowest pace since 2009. Even the
U.S., viewed as the locomotive of global growth, is forecasted to grow only 2.0% in
2016. Although the global economy is slowing, the global consumption of agricultural
commodities is not significantly affected. Agriculture is facing headwinds with falling
commodity prices and land values because of record supplies (see chart). We expect
grain prices to reach their bottom in 2016 and to continue affecting farmland values
this year. In our view, this could translate into U.S. land values falling 18% from their
peak in 2013 to their trough in 2016. Any further declines should be mitigated if
commodity prices start to rise by the end of this year.
Global Crop Production Balance
Production
Million Metric Tons
Consumption
3,300
3,100
2,900
2,700
2,500
2,300
2015/16F
2014/15E
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1,900
1,700
1,500
1991/92
2,100
1990/91
“The global
supply glut is not
due to weaker
demand, but excess
production. Three
years of favorable
growing conditions
have led to low Ag
commodity prices.”
Source: Historical: Doane Ag Services, Forecast: MetLife
Grain prices should bottom out in 2016, but any significant price rebound will require a
supply pullback.
While international demand remains strong, low prices pose a major challenge to farmers. The
strong U.S. dollar has dragged domestic prices even lower, providing U.S. farmers an incentive
to reduce acreage in 2016 compared to farmers in other countries with weaker currencies.
However, any major decline in acreage in 2016 versus 2015 will be difficult to achieve because of
the unusually small acreage base last year. The spring of 2015 was particularly wet causing nearly
7MM acres of U.S. farmland to go unplanted. We expect the principal acreage base to be modestly
lower in 2016 as farmers respond to low prices. It is likely that wheat and other small grains will
decline the most due to lower profitability while corn, which offers a more favorable expected
return due to low fertilizer and fuel prices, should post a 2% gain. Soybean should retain a flat
acreage base as it remains a popular lower cost crop.
La Niña could push grain prices higher by reducing yields, providing a near-term
supply pullback.
La Niña is characterized by drier weather in major grain producing regions of the Americas.
We believe the weather phenomenon could materialize in the second half of the year and have a
negative impact on crop yields in the U.S. and also Brazil and Argentina. This suggests that crop
yields face a major downside risk in 2016 and 2017, supporting commodity prices and stabilizing
U.S. farm profitability following the sharp decline of 2015. It would take only a minor hit on corn
yields to jolt the market and push major grain prices more than 15% higher by year end. Such a
scenario would have corn prices pushing the $4.00/bu-mark from the sub-$3.50 levels observed in
early 2016.
The commodity price correction has sent land values down a moderate 6% since its 2013 peak.
Land values are declining, but at a much slower pace than commodity prices. If we use the
Seventh Federal Reserve District - covering Illinois, Indiana, Iowa and Wisconsin - as proxy
for U.S. farmland values, the average land value decline was 3% in 2015. Coupled with the 3%
drop observed in 2014, the cumulative decline over the 2014-15 period reached 6%. However,
increasing disparity exists depending on the region and land use. In 2015, farmland values
declined 9% in North Dakota led by a major pullback in wheat prices, while ranchland states,
like Oklahoma, saw a 9.1% gain over the same period due to strong cattle fundamentals in first
half 2015. In Western States, we observed double-digit gains (+10%) for non-irrigated cropland
compared to negative returns (-14%) for irrigated cropland.
The State of Agriculture—Spring 2016 | 2
We believe U.S. farmland values could drop 18% from peak (2013) to trough (2016).
As with most asset classes, record low interest rates have played a role in supporting land values.
Low interest rates not only make alternative investments, such as bonds, less appealing, but also
lower farmers’ debt payments, boosting the appeal of farmland as an investment. Interest rates
will rise, but it is unclear how fast and how soon. We expect the 10-year U.S. Treasury yield to
gradually rise in the next 5-7 years, struggling to reach more than 3.5%-3.75%. Figure 1 shows
a 0.25% rate increase translates into a 7.7% decline in the capitalized value of cash rents using
a discount rate of 3.0%. Although not always correlated, these capitalized values can serve as a
reference point for farmland values. A 25 basis point increase in the discount rate along with a
5% decline in cash rents, results in a total decline of 12.3% in capitalized values. In our view, land
values could fall 18% from their peak in 2013 to their trough in 2016. We do not foresee a decline
greater than 18% since we expect commodity prices to turn the corner by the end of 2016 and act
as mitigating factor to additional downward pressure on U.S. farmland values.
Figure 1: Capitalized Value of Cash Rents–Iowa
Inital:
$250 rent
3.00%
=
$8,333/acre
With 25 bps rate increase
$250
3.25%
=
$7,962/acre
(-7.7%)
With 5% decline in rent
$238 rent
3.25%
=
$7,308/acre
(-5%)
cumulative: (-12.3%)
Agricultural
Market Research
About MetLife Agricultural Finance
MetLife Agricultural Finance ranks among the most active private agricultural, agribusiness and timberland mortgage
lenders in North America, with a total agricultural mortgage portfolio of $13.6 billion*. We specialize in providing
fixed and variable rate mortgage financing for a full range of capital needs.
Whether you’re looking to re-amortize your term debt, expand your operation or refinance an existing mortgage,
MetLife can tailor a loan to fit your needs. Our regional network keeps us close to our markets and better positioned
to serve your immediate and long-term mortgage financing
Hugues Rinfret
CFA, FRM
For more information, please visit us at www.metlife.com/ag.
*Includes MetLife general account assets as of 3/31/16.
Eric Rama
All information contained herein has been obtained by MetLife from sources believed by it to be reliable. The analysis, opinions, forecasts and
predictions contained herein are believed by MetLife to be as accurate as the data and methodologies will permit. However, MetLife makes no
representations or warranties, either expressed or implied, to any persons as to the completeness, accuracy and reliability of such information,
forecast and/or predictions and expressly disclaims any liability with respect to any of the foregoing.
These views are those of MetLife, Inc. in connection with management of its own proprietary accounts. MLIA does not currently provide investment
advice concerning agriculture at the present time.
© 2016 METLIFE, INC. L0716472177[exp1218]
MetLife Agricultural Finance
10801 Mastin Blvd, Suite 930
Overland Park, KS 66210
www.metlife.com/ag