Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 1 Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis Economic/Policy Backdrop Market Dynamics Measures taken to combat the COVID-19 pandemic are likely to give rise to a major economic correction worldwide in 2020, and the 2020 economic downturn in the U.S. and globally may be one of the deepest on record. Even with the passage and implementation of the CARES Act and the U.S. Federal Reserve’s emergency provision of extra liquidity to the U.S. economy, forecasts as of April 23 rd for the Q2 2020 U.S. inflation-adjusted GDP range from -25 percent to -45 percent, SAAR. U.S. Agricultural Sector The COVID-19 pandemic is already generating major headwinds for the key drivers of demand for food, feed, fuel and fiber, in both domestic & export markets. Forecasts of U.S. GDP for Q2 2020 Real, Quarter/Quarter, SAAR (estimates as of April 23, 2020) Forecast UBS -25 Citigroup -28 Rabobank -31 JPMorgan Chase -40 Barclays -45 Source: Bloomberg, April 30, 2020
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Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 1
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis
Economic/Policy Backdrop Market Dynamics Measures taken to combat the COVID-19 pandemic are likely to give rise to a
major economic correction worldwide in 2020, and the 2020 economic downturn
in the U.S. and globally may be one of the deepest on record. Even with the
passage and implementation of the CARES Act and the U.S. Federal Reserve’s
emergency provision of extra liquidity to the U.S. economy, forecasts as of April
23rd
for the Q2 2020 U.S. inflation-adjusted GDP range from -25 percent to -45
percent, SAAR.
U.S. Agricultural Sector The COVID-19 pandemic is already generating major headwinds for the key
drivers of demand for food, feed, fuel and fiber, in both domestic & export
markets.
Forecasts of U.S. GDP for Q2 2020 Real, Quarter/Quarter, SAAR (estimates as of April 23, 2020)
Forecast
UBS -25
Citigroup -28
Rabobank -31
JPMorgan Chase -40
Barclays -45
Source: Bloomberg, April 30, 2020
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 2
Domestic Demand Major setbacks in employment and the stock market have eroded consumer confidence and spending. In
agriculture, quarantines, working from home & social distancing are contributing to changing end-uses and
substitution among crops, and increased financial pressure on households & the overall economy will translate into
a reduction in demand for crops.
Especially vulnerable will be crops used for feed, fuel and fiber, while demand for food should be more resilient.
High-value food crops such as fruits and nuts are especially well-positioned, supporting the trend toward more
stable food demand.
Feed will be impacted by less demand for meat, with tighter household budgets and the shutdown of restaurants
and other food services. Biofuels will suffer from reduced travel and the collapse in oil prices. Fiber crops face
diminished demand due a sharp drop in apparel purchases. Lower petroleum feedstock prices have also made
biofuels and cotton less competitive than their petroleum-based substitutes.
The weakness in away-from-home and food service demand might persist beyond the easing of COVID-19
restrictions on socializing, as consumers remain wary of both gathering in public places and traveling. The
pandemic will likely accelerate the shift to online ordering and home delivery of groceries and meals. Another
potential medium-term effect could be a transition to more local food production, both at home and internationally,
leading to greater regional disparity in agricultural pricing.
Supply Chain Disruption
The spread and containment of COVID-19 have disrupted agricultural production and distribution. Border closures
and the suspension of new migrant worker visas have created uncertainty around labor-intensive farm activities;
and this may impact labor costs as well as worker availability. A reduction in transportation capacity, fewer workers
and a dramatic shift towards buying groceries and away from food service are inducing a number of short-term
supply chain shocks. Fresh, perishable products are particularly vulnerable to these supply chain disruptions,
leading to logistics and processing delays, as well as, reportedly, crops left to rot in the fields.
Agribusiness is struggling to adapt to this quickly shifting situation, resulting in reduced food service demand and
sharply higher grocery demand. Before the COVID-19 pandemic, most food spending in the U.S. happened away
from home. But with the sudden closure of restaurants, schools, hotels, and other food service channels due to
quarantines and social distancing, the supply chain originally put in place for these facilities is struggling to refocus
on consumer grocery, which involves different requirements for packaging, labeling and product mix.
Agricultural Trade
The degree of the impact of the COVID-19 pandemic on agricultural commodity exports will differ substantially from
country to country. Northern hemisphere agricultural farm product sales and exports primarily occur in Q4 and the
proceeding Q1, following harvest. Consequently, for U.S. and Canadian producers, the heaviest export season may
have occurred before the expected peak in COVID-19 cases in Q2 and Q3, when worker shortages due to illness
and fear of contagion will restrict shipping and port activity. By contrast, in the southern hemisphere, Brazil, a major
agricultural exporter, is expected to experience an overlap between the upswing in COVID-19 cases and the peak
crop-exporting season.
Looking Forward
Broad fiscal and monetary stimulus programs, along with support programs specifically targeting the U.S.
agricultural sector, will soften some of the negative impacts to agriculture caused by the COVID-19 crisis. The
CARES Act includes $19 billion in assistance for U.S. farmers, as well as funding for food assistance programs.
Low interest rates and increased credit availability for small businesses will reduce debt service costs and should
reinforce farmland values by shifting cap rates lower. Farm income will also benefit from reduced agricultural input
costs as a result of the sharp drop in energy and petrochemical prices, such as those for fuel, lubricants, electricity
and maybe fertilizer and certain agricultural chemicals.
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 3
As we emerge from the COVID-19 pandemic, record low interest rates and the U.S. dollar pulling back from current
highs should help reactivate the U.S. farm sector. Trade tensions and related tariffs between the U.S. and its major
agricultural customers have eased from their heightened levels in 2018 and 2019. However, in moving to a post-
COVID-19 new normal, performance will vary across regions and among crops, with improving prospects for some
segments offset by more intense competitive pressures for others. The agriculture sector will be able to adapt to
changes in supply chains, production costs and consumer habits, as farmers respond to price signals to adjust to
shifting demand.
Crop Price Outlook
Weak Q2 demand could result in the building up of higher inventories for a number of agricultural commodities
leading into the 2020 crop marketing year, which begins in late Q3.
With the prospect of higher inventories shadowing the market, agricultural prices are expected to move lower,
though the size of the retreat will vary significantly by crop. Corn prices, for example, have already corrected sharply,
dropping back close to the cyclical lows reached in 2016 and 2017, as this commodity contends with COVID-19-
related demand and supply disruptions, as well as major corrections in the demand and price for fuel ethanol. In
contrast, soybeans were already experiencing reduced margins prior to the COVID-19 crisis, and prices have limited
room to correct lower.
Compared to row crops, storable permanent crops have better price prospects in 2020. Storable, permanent crops
like apples and tree nuts, focused as they are on food end-uses, with no exposure to energy (corn), feed (soybeans)
or textiles (cotton), should fare relatively well from a demand perspective. Nevertheless, expectations of weaker
trade in 2020 will dampen the outlook for the price of both row and permanent crops.
Scenario Analysis*
Two scenarios have been developed illustrating potential pathways to resolve the health crisis and achieve an economic
recovery. Amid this fast-moving pandemic and the unprecedented policy responses, forecasting has become extremely
problematic and projections must be met with some skepticism. These scenarios are not meant to offer a best and a
worst case, but rather suggest a range of plausible outcomes, which we believe have a reasonable chance of
materializing. The scenarios involve assumptions based on current data, forecasts from a range of third-party analyses,
and the progress of countries that were early victims of the COVID-19 outbreak (China, Japan, Korea, Singapore and
Taiwan) and which are now in the process of restarting their economies, rolling back quarantines, re-opening shuttered
businesses, and easing travel restrictions.
(a) U.S. Baseline Scenario – V-shaped recovery
Economic and sector-specific assumptions
The U.S. will begin to emerge from stay-in-place measures in May. Return to normality will proceed in phases in Q3
as we see steady improvement in the incident rate of COVID-19. Ongoing improvements in the response to
incidents of COVID-19 (including monitoring, tracking, treatment and containment efforts) will reinforce the economic
recovery and add to its momentum. Large segments of the U.S. economy will approach normal functioning in Q4,
supported by the government’s massive fiscal and monetary stimulus.
At the end of 2020 and in early 2021, some sectors will still contend with obstacles in the supply chain (construction,
manufacturing, tech), weak offshore demand and increased international competition (agricultural and other globally
traded commodities), and some will face new consumption patterns (travel and entertainment, retail and commercial
real estate). However, in the first half of 2021, the U.S. economy will regain forward momentum with material gains
in employment as U.S. retail businesses reopen, consumer confidence rebounds, and international trade returns to
normal. Housing activity should benefit from historically low interest rates, deferred purchase decisions, and a dip in
home price appreciation. Agricultural prices should also benefit as consumer spending increases with a stronger job
market, and as trade and transportation rebound.
* The following is for informational purposes only. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee for future results.
Agriculture and Farmland Market Outlook: COVID-19 Scenario Analysis, May 2020 4
Implications for farmland operating results and cash flow – Agricultural income will suffer from weaker pricing
in Q2 and Q3 of 2020, but should start to improve by Q4 just as 2020 harvests wrap up, with U.S. economic activity
ramping up and China’s economy in recovery. Agricultural 2020 export demand from the U.S. will likely be down
year-over-year by 5 percent to 10 percent, with a corresponding decline in agricultural commodity demand and
prices. By comparison, during the global financial crisis, U.S. agricultural exports for 2009 ($98 billion) were down
14 percent from 2008.1
Farm balance sheets have gradually weakened from several years of low commodity prices and a corresponding
increase in leverage. Farm assets reached $3.1 trillion in 2019, up 2 percent over 2018.2 Farm debt continued to
grow in 2019, approaching $416 billion – up 3 percent over 2018 – but the sector’s debt-to-equity ratio only rose
modestly from 15.3 in 2018 to 15.5 in 2019.3 In fact, while solvency risk has increased slightly in recent years, the
sector’s debt-to-equity ratio remains below the long-term average (1970 to 2018) of 18.2.4
Price implications for agricultural commodities – In response to the COVID-19-induced 2020 economic
downturn, agricultural prices will vary by crop, however in each case expectations have been lowered compared to
late 2019 forecasts, and crop yields remain a major driver of price. The baseline scenario has 2019 marketing year
corn price expectations slightly below last year’s of $3.61 per bushel, but potentially falling back towards the lows of
2016 and 2017, and little recovery in 2020, before recovering in the 2021 marketing year. Almond prices for the
2019 marketing year are expected to slide at least 3%, before rebounding for the 2020 marketing year, though
remaining below prior expectations due to potentially slower export demand as the global economy continues to
recover in Q4 2020 and Q1 2021. Prices for both crops are expected to return to near HNRG’s previously projected
long-term trend for subsequent years.
Prospective changes in property and investment values
Farmland values are likely to adjust lower, with predictions based on dampened expectations of future demand and
crop revenue, and increased perceptions of risk. This potential downward price adjustment, however, will be
moderated by lower interest rates as well as farm support programs. U.S. farmland values could move 3 percent to
5 percent lower in 2020-2021, with a more gradual slide for institutional-quality properties, before values recover in
2021 and continue to improve long-term. How much values decline in 2020 and 2021 will vary with the quality of a
property, though in general, row crop farmland may be more vulnerable than permanent crop farmland in the short
run.
(b) Pessimistic Scenario – U-shaped recovery
With persistently high infection rates, the intermittent emergence of new hot spots, and only marginal relief from
seasonally warmer weather, widespread U.S. stay-in-place protocols remain in effect well into Q3. Economic
recovery is hampered by a second round of infection in the fall and early winter of 2020, resulting in continuing
restrictions on travel, assembly and business activity, as well as further cautious consumer and business behavior
and only a sluggish improvement in employment.
The difficulties experienced by the U.S. in regaining economic traction are amplified by a disappointing response to
the COVID-19 pandemic in Europe and in developing and emerging economies; the result is a more extended
downturn in the U.S., along with a pronounced global economic recession. This U-shaped recovery, in contrast to
the V-shaped recovery envisioned in the Baseline Scenario, delays a robust bounce-back in economic growth until
mid-2021.
The extended nature of an economic downturn in the U.S. and abroad (assumed in the Pessimistic Scenario)
results in permanent losses in GDP potential and in-place manufacturing capacity and will call for additional
government intervention. Expanding federal and state deficit spending will set the stage for raising individual and
business tax rates, further dampening hope of future economic progress.
1 USDA Foreign Agricultural Service, Global Agricultural Trade System, accessed April 30, 2020. https://apps.fas.usda.gov/gats/default.aspx
2 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
3 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
4 USDA Economic Research Service, Farm Income and Wealth Statistics, February 2020, https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/
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