Hancock Farmland Investor Q4 2016 · 2017-03-28 · Q4 2016, virtually unchanged from Q4 2015....

Hancock Agricultural Investment Group Fourth Quarter 2016

Hancock Farmland Investor Fourth Quarter 2016

2016 Farmland Investment Performance

U.S. farmland properties returned 7.1 percent in 2016, 326 bps below 2015 returns and continued the downward correction that began in 2014.

U.S. private farmland investment returns fell 326 bps from 2015 and over 500 bps since 2014, largely driven by three factors: commodity prices, farmland values and on-farm profitability. Four consecutive years of strong production have led to increased ending inventories of crops in the U.S. and declining prices. The significant decline in commodity prices has led to lower on-farm cash receipts (revenues), which, in turn, has led to a decline in on-farm profitability, despite a decline in production costs. The drop in commodity prices and on-farm profitability has led to a decrease in farmland values. As a result of these three factors, farmland operating income returns have declined from 7.9% in 2014 to 5.2% in 2016 (270 bps), while land appreciation returns have dropped 4.5% in 2014 to 1.9% in 2016 (260 bps).

The most recognized measure of farmland performance in the U.S. is the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Property Index. At year-end 2016, the NCREIF Farmland Property Index included 743 properties valued at $8 billion, compared to 2015 when the Index included 667 properties valued at $6.7 billion.

NCREIF provides break-outs of farmland returns by type of operation (annual and permanent cropland) and for eight different regions (Pacific West, Pacific Northwest, Corn Belt, Delta States, Southeast, Mountain, Southern Plains and Lake States). Annual cropland properties are those that need to be planted on an annual basis, such as corn and soybeans. Permanent cropland properties are properties devoted to woody trees, shrubs or vines, such as almonds, apples, cranberries and grapes. At year-end 2016, there were 492 annual cropland properties in the NCREIF Farmland Property Index valued at $4.3 billion (55 percent of the index by value) and 251 permanent cropland properties valued at $3.6 billion (45 percent of the index by value). In 2016, the largest NCREIF sub-region by market value was the Pacific West (48 percent of the total index), followed by the Delta States region at 16 percent, the Corn Belt region at 10 percent and the Mountain region at 7 percent. The remaining regions combined, accounted for 19 percent of the index value.

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Sources: NCREIF; HNRG Research

Chart 1: U.S. Farmland Returns (percent per year)

Chart 2: NCREIF Properties and Market Value


Hancock Agricultural Investment Group Fourth Quarter 2016 2

Performance Results In addition to reporting total farmland returns, NCREIF separates returns into two components: operating income and capital appreciation. In 2016, the total return for all properties in the Index was 7.1 percent (Chart 1, page 1), a decrease of 326 basis points from 2015’s 10.4 percent return and 607 basis points below the 10-year average of 13.2 percent.

The Farmland Property Index total return for 2016 was the lowest return since 2002. Lower crop prices across the board, declining farmland values (especially in the Pacific West and the Corn Belt), and declining U.S. competitiveness in export markets due to a strengthening U.S. dollar were the primary drivers of the low return. As a result, 2016 total farmland income returns (largely driven by price and farm income), fell by 54 basis points, while total farmland capital appreciation returns (driven by land values) declined by 262 basis points.

The total return for annual crop properties in 2016 was 4.7 percent, down 47 basis points from 2015 (see Chart 3). The decline in total annual cropland performance in 2016 was tied to declines in both the operating income return and the capital appreciation return. Overall, the operating income return for annual crop properties was 3.59 percent (down 13 basis points); while the capital appreciation return was 1.09 percent (down 33 basis points). Declining crop prices led to lower on-farm profitability and operating income returns for the fourth consecutive year, which, in turn, has led to declining farmland values and capital appreciation returns.

Although permanent cropland performed significantly better than annual cropland in 2016, with total returns reaching 10.1 percent, permanent cropland returns continued to fall from the peak level reached in 2013 (Chart 4). Total returns for

permanent cropland returns fell 687 basis points from 2015. In 2016, capital appreciation returns were 2.78 percent (down 574 basis points from 2015 and 736 basis points from their peak in 2013), while operating income returns were 7.17 percent (down 85 basis points from 2015 and 1,140 basis points from 2013).

On a regional basis, farmland performance varied significantly across regions, with properties in the Pacific Northwest and Lake States showing significant gains and properties in the Pacific West, Corn Belt and Southeast showing significant declines. In the Pacific Northwest and Lake States, return gains were driven primarily by significant increases in capital appreciation over 2015 (594 basis points in the Pacific Northwest and 242 basis points in the Lake States). The capital appreciation gain in the Pacific Northwest was driven by increasing permanent crop land values (primarily apples), while the gain in the Lake States was driven by increasing annual crop land values (soybeans, corn and vegetables). In both regions, operating income returns improved over 2015, but at nowhere near the rate of capital appreciation.

In the Pacific West, Corn Belt and Southeast, total farmland return declines were also driven by declines in capital appreciation returns, especially for annual cropland. Water restrictions due to the drought in the Pacific West have led to reduced productivity for some annual cropland farmers in California over the past four years and have led to some farmers leaving their land fallow. As a result, capital appreciation for annual cropland in the region fell 592 basis points from 2015 and 993 basis points from its peak in 2013. In the Corn Belt and Southeast regions, four consecutive years of strong soybean and corn production have led to extremely high inventories, pushing prices and farmland values downward. In 2016, capital appreciation in the Corn Belt declined by 441 basis points from 2015 and 2,740 basis points from its peak in 2012, while capital

(Continued on page 6)

2016 Farmland Investment Performance (Continued from page 1)

Chart 3: U.S. Annual Cropland Returns (percent per year)


Chart 4: U.S. Permanent Cropland Returns (percent per year)



Figure 2. Soybean Production Brazil’s soybean production is projected to decrease slightly to 96.5 MMT in 2015/16 as a result of reduced planted area and lower yields due to poor weather. Favorable soybean planting conditions in Brazil and increased acreage are expected to boost Brazil’s soybean production to 104 MMT in 2016/17. Argentina’s soybean production is projected to decrease by 7.5% to 56.8 MMT in 2015/16 and decrease slightly to 55.5 MMT in 2016/17 as export tax policies have made corn production more attractive than soybean production. Argentina eliminated its corn export tax completely, while the soybean export tax was reduced from 35% to 30%. U.S. soybean production in 2015/16 is projected to increase slightly from 2014/15 production to 106.9 MMT and to increase by 10% in 2016/17 to 117.2 MMT due to increased harvested acreage and strong yields caused by excellent growing conditions. In addition, the higher price of soybeans has made soybeans more attractive relative to corn for U.S. farmers.

Figure 1. Corn Production U.S. corn production is projected at 345.5 MMT for the 2015/16 marketing year, a 4% decline from 2014/15. 2016/17 production is projected to increase to 384.8 MMT due to an increase in harvested acres and good weather conditions during the growing season. Brazil’s 2015/16 corn crop decreased by 21% from 2014/15 to 67 MMT due to poor yields of the second crop, but 2016/17 production is expected to rebound to 86.5 MMT on higher acreage and better yields. Argentina’s 2015/16 projected corn production of 29 MMT represents a slight increase from 2014/15, however 2016/17 corn production is projected to increase to 36.5 MMT as farmers take advantage of the elimination of corn export taxes by planting more acreage to corn. South African 2015/16 corn is projected at 7.9 MMT, a significant decline from 2014/15 due to drought conditions. As South Africa recovers from the drought in 2016/17, production is expected to rebound to 13 MMT. China’s corn production in 2015/16 is projected at 224.6 MMT a 4% increase from 2014/15, but production is expected to fall to 219.6 MMT in 2016/17 due to the removal of price supports for corn production.

Figure 3. Currency Exchange Rates The USD depreciated against most other currencies in 2016. When comparing the strength of the USD to competitive currencies between Q4 2016 and Q4 2015:

The Brazilian real appreciated 22% against the USD

The Russian ruble appreciated 20% against the USD

The Canadian dollar appreciated 4% against the USD

The Argentine peso depreciated 19% against the USD, largely due to the Macri government devaluing the peso in December of last year;

The Australian dollar depreciated 1% against the USD.

Quarterly Corn Production Estimates, Major Producers (Million Metric Tons)

Sources: USDA WASDE. Note: 2015 data are estimates and 2016 data are projections, updates are made on a corn marketing year basis.

Sources: USDA WASDE. Note: 2015 data are estimates and 2016 data are projections, updates are made on a soybean marketing year basis.

Quarterly Soybean Production Estimates, Major Producers (Million Metric Tons)

Sources: Macrobond, HNRG Research

Quarterly Exchange Rates Between USD and Agricultural Currencies (Indexed to 1 at 2006: Q1)


Figure 6. Chinese Corn and Soybean Imports Chinese imports of corn and soybeans totaled 22.2 MMT in Q4 2016, virtually unchanged from Q4 2015. Comparing Chinese corn imports for 2016 with 2015, corn imports have decreased by 33%. Corn imports have been impacted by the government’s decision to increase the amount of corn auctions from state reserves. Comparing Chinese soybean imports from 2016 with 2015, soybean imports increased by 4%. China’s soybean imports have been negatively influenced by a strong domestic soybean crop and weak soybean supplies in Brazil and Argentina. However, imports continue to rise year-over-year.

Figure 4. Corn Exports Brazil’s four quarter moving average corn export volume at 5.5 MMT in 4Q 2016 decreased by 24% since last year and by 38% since last quarter as supplies have tightened. Brazil’s corn exports during the 2015/16 marketing year have been constrained by the drop in production for Brazil’s 2015/16 crop. Argentina’s four quarter moving average volume of corn exports in 4Q 2016 of 5.3 MMT increased by 13% since last quarter and by 43% since last year as a result of the removal of corn export taxes. US four quarter moving average corn export volume in 4Q 2016 of 14 MMT, increased by 9% quarter-over-quarter and increased by 26% year-over-year. The drop in Brazil’s production for the 2015/16 marketing year along with strong U.S. corn production and declining prices has helped the U.S. to take corn export market share away from Brazil.

Figure 5. Soybean Exports The US four quarter moving average soybean export volume was 14.4 MMT in 4Q 2016, which was an increase of 20% from last year and by 7% from last quarter. Brazil’s four quarter moving average soybean export volume at 12.9 MMT, decreased by 5% from last quarter and also by 5% from last year. Argentina’s four quarter moving average soybean export volume of 2 MMT, fell by 10% since last quarter and decreased by 9% year-over-year. Argentina’s and Brazil’s export sales have been negatively affected by lower production in the 2015/16 marketing year.

Four Quarter Moving Average Corn Exports, Major Producers (Million Metric Tons)

Four Quarter Moving Average Soybean Exports, Major Producers (Million Metric Tons)

Source: China General Administration of Customs

Quarterly Corn and Soybean China Imports (Million Metric Tons)

Sources: Argentinian Ministry of Agroindustry, Aliceweb, USDA, HNRG Research Quarterly export data is a four quarter moving average

Sources: Argentinian Ministry of Agroindustry, Aliceweb, USDA, HNRG Research Quarterly export data is a four quarter moving average


Figure 9. Row Cropland Returns USDA 2016 row crop cash receipts are forecast to increase by 2.5% to $162 billion from last year as higher oil crop cash receipts offset declines in feed crop and food grain receipts. This increase in USDA row crop cash receipts comes after 3 consecutive years of decline. In 2017, USDA row crop cash receipts are forecast to decrease slightly by 0.12%, as a result of the continued expectation of price declines in row crop products. The NCREIF row crop total returns for 2017 are also likely to be negatively impacted by declining row crop receipts. NCREIF row crop total return in 4Q 2016 was 1.16%, which made NCREIF row crop total return for the 2016 year 4.71%. The NCREIF row crop total return of 2016 is the lowest annual total return for row crops in the history of the index. The NCREIF row crop income return component of 3.59%, was at a historical low. NCREIF’s appreciation component of the total row crop return was 1.09% and the lowest that it has been since 2001.

Figure 7. Row Crop Prices U.S. corn and soybean prices declined in Q4 2016, while the U.S. wheat price increased. The decline in corn and soybean prices was driven by strong 2016/17 production levels, while the increase in wheat prices was driven by strong export sales. Comparing the prices between 4Q 2015 and 4Q 2016: the wheat price declined by 21% to $3.84/bu; the corn price declined by 10% to $3.28/bu and the soybean price increased by 8% to $9.47/bu. Corn and wheat prices declined in 4Q 2016 over 4Q 2015 due to record projected production and ending stocks for the 2016/17 marketing year. The corn stocks to use ratio is projected to increase to 16% in 2016/17 from 13% in 2015/16 while the wheat stocks to use ratio is projected to remain over 50% for the 2016/17 marketing year. The soybean stocks to use ratio is projected to increase to 10% in the 2016/17 marketing, up from 5% in the 2015/16 marketing year. Despite the increase in the soybean stocks to use ratio, soybean prices are expected to increase in the 2016/17 marketing year. Strong U.S. exports and constrained supply in South America have been a positive influence on the U.S. soybean 2016/17 price.

Figure 8. Tree Nut Prices The U.S. is a major producer of tree nuts, accounting for approximately 82% of the world’s almonds, 28% of the world’s walnuts and 23% of the world’s pistachios in 2015. Prices are projected to decline for all 3 nuts as favorable weather has allowed almond, walnut and pistachio growers to set new production records in the 2016/17 marketing year. U.S. walnut production is expected to increase 11% to 607.8 thousand metric tons in 2016/17, while U.S. almonds are projected to increase 8% to 929.9 thousand metrics tons. Data for pistachio productions is not yet available but it is predicted to be a record crop. Comparing U.S. nut prices in 2016/17, with nut prices in 2015/16: Almond prices are projected to decline by 27% to $2.07/

lb Walnut prices are projected to decline by 8% to $0.74/lb Pistachio prices are forecast to decline by 26% in

2016/17 to $1.83/lb

Sources: USDA NASS, Prices reported as received by buyer, Nichols Farms, BLS, HNRG Research. 2016 tree nut prices are HNRG estimates, official prices to be reported by the USDA.

Quarterly U.S. Row Crop Prices ($USD per bu)

Sources: USDA ERS, NCREIF Farmland Index 2016 USDA row crop receipts are a forecast

NCREIF Row Crops Total Return (percent per year) and USDA Row Crops Cash Receipts (y/o/y percent change)

Annual U.S. Average Grower Tree Nut Prices ($USD per lb.)

Source: USDA NASS, Prices reported as received by buyer


NOTES: Figure 1. Corn production is charted on a calendar year basis and updated on a marketing year basis. The corn marketing year is from September to August for the U.S., from May to April for South Africa, and from October to September for China. The corn marketing year is from March to February in Argentina and Brazil. Corn Production data and forecasts are updated on a monthly basis by the USDA World Agricultural Supply and Demand Estimates Report (WASDE). Figure 2. Soybean production is charted on a calendar year basis and updated on a marketing year basis. The soybean marketing year is from September to August for the U.S., from February to January for Brazil and for April to March for Argenti-na. Soybean Production data and forecasts are updated on a monthly basis by the USDA World Agricultural Supply and Demand Estimates Report (WASDE). Figure 3. Exchanges rates are updated on a daily basis by Macrobond Financial AB. Figure 4. Argentina’s agricultural exports are published on a monthly basis by the Argentinian Ministry of Agroindustry. Brazil export data is published on a monthly basis by Aliceweb. U.S. exports are published on a monthly basis by the U.S. Census Bureau. Export data is reported on a 4 quarter moving average to adjust for seasonality. Figure 5. Argentina’s agricultural exports are published on a monthly basis by the Argentinian Ministry of Agroindustry. Brazil export data is published on a monthly basis by Aliceweb. U.S. exports are published on a monthly basis by the U.S. Census Bureau. Export data is reported on a 4 quarter moving average to adjust for seasonality.

Figure 6. China’s soybean and corn imports are published on a monthly basis by the China General Administration of Customs.

Figure 7. Row Crop Prices are published on a monthly basis by the USDA National Agricultural Statistics Service (USDA NASS). Figure 8. Permanent Crop Prices are published on a annual basis by the USDA National Agricultural Statistics Service (USDA NASS). Walnuts price estimates for the current year are calculated by using the percent annual changes for the crop year in the Producer Price Index for walnuts, published by the Bureau of Labor Statistics on a monthly basis. Annual estimates for pistachios are calculated by using the percent annual changes for the crop year in the prices published in the Market Reports from Nichols Farms. Almond price estimates for the current year are calculated by using the percent annual changes for the crop year in the prices from HNRG sources. Figure 9. USDA Cash Crop Receipts data is published three times a year in February, August and November by the USDA’s Department of Agriculture Eco-nomic Research Service. The U.S. level calendar-year forecast is first published in February. The August release converts the previous year’s forecast to estimates and the November release updates the current year forecast. NCREIF Farmland Total Return data is published on a quarterly basis. NCREIF quarterly total row crops returns are aggregated to form the total return for the year. The total return as seen on the bar chart may not equal the annual total return as reported by NCREIF, because the NCREIF annual return is calculated by multiplying instead of adding quarterly returns together.

appreciation in the Southeast fell 155 basis points. In all three regions, operating income also declined, but not at the same rate as capital appreciation.

Looking Ahead The moderation in NCREIF farmland returns experienced over the last four years reflects declining agricultural commodity prices, four consecutive years of bumper crops globally, and the creation of high stock levels.

Expectations for 2017 remain muted due to:

Yet another strong production year globally and in the U.S. pushing stocks to even higher levels;

The continued strength of the USD will continue to make U.S. agricultural commodities less competitive in the export markets;

Trade policies instituted by President Trump are expected to dampen export potential into Mexico and China: two of the U.S.’ three major agricultural trading partners;

Four consecutive years of commodity price declines, leading to declining on-farm profitability, operating returns and farmland values.

HNRG Research Team

References to expected investment performance in this newsletter are based on historical information and are based on managements projections. Potential for profit as well as for loss exists. Hancock Agricultural Investment Group is a division of Hancock Natural Resource Group, Inc., a registered investment advisor and wholly owned subsidiary of Manulife Financial Corporation. © Hancock Natural Resource Group, Inc.

Court Washburn Managing Director and Chief Investment Officer [email protected] Keith Balter Director of Economic Research [email protected] Bill Devens Senior Agricultural Economist [email protected] Mary Ellen Aronow Senior Forest Economist [email protected] Elizabeth Shestakova Economic Research Analyst [email protected] Keith Goplerud, CFA Economic Research Analyst [email protected]

2016 Farmland Investment Performance (Continued from page 2)

Table 1: Regional U.S. Farmland Calendar Year Performance, 2016


Pacific West Pacific

Northwest Corn Belt Delta States Southeast Mountain Southern

Plains Lake States

Income 6.65% 4.04% 2.96% 3.12% 4.83% 3.97% 5.10% 6.31%

bps change from 2015 -131 248 -19 -40 -71 11 10 58

Appreciation 4.05% 4.62% -7.35% -0.35% 2.88% 5.61% 2.64% -1.61%

bps change from 2015 -592 594 -441 -3 -155 -85 69 242

Total Return 10.94% 8.80% -4.56% 2.77% 7.81% 9.75% 7.84% 4.63%

bps change from 2015 -753 857 -470 -42 -237 -76 82 308

Hancock Farmland Investor Q4 2016 · 2017-03-28 · Q4 2016, virtually unchanged from Q4 2015....

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