We’re living in a very…unique economic environment.
As we emerge from last year’s global economic slowdown, markets are already showing signs of accelerated growth and a boom in international trade.
But the general situation feels shaky. Although the Fed insists it’s not concerned about inflation, investors can’t help but be wary of the massive amount of QE policies being instituted across the globe.
So where does that leave us? Here are some major takeaways from 2021’s current outlook.
Evolving Demand in Agriculture
To be perfectly honest, demand for agriculture is destined to rise no matter what the rest of 2021 holds. With a global population well on its way to 10 billion (the UN’s estimate for 2050), agricultural output will need to rise massively in order to meet the food security demands of the future.
But the pandemic has altered the dynamics of the ag sector in a very significant way.
For example, the food delivery services that were once confined to the developed world have quickly spread to middle-income nations such as Colombia, where popular delivery service Rappi expanded its business by over 20% during the pandemic.
The food supply chain is being reshaped in front of our very eyes, especially the downstream phases. Consumers are not only spending more money on food (likely tied to a higher level of disposable income thanks to stimulus), but they’re branching out into new cuisines and product types.
There’s also the health craze to consider. Clearly not a passing fad, consumers truly are reshaping their diets in order to bolster their immune systems. This trend certainly existed before the pandemic, but global COVID hypochondria has send it into overdrive.
So what does that mean for ag producers? In the short term, it would seem that a rising tide lifts all boats – that is to say that rising commodity prices in general will create favorable outcomes for producers in a variety of crop sectors and geographical locations.
Take China for instance. For years the world’s largest importer of ag products, the Asian giant’s suspiciously quick recovery has prompted an increase in soybean and corn prices. China’s grain imports come mainly from the US, so its spike in demand, at first glance, seems like a boon to US producers.
But all is not as it seems. The emergence of other large-scale industrial grain producers, namely Brazil, will ultimately put downward pressure on prices, especially considering that farms in the US are highly subsidized by the federal government and probably significantly overleveraged, considering the low interest rate environment that has defined the federal COVID response.
US farmland is also highly financialized. Institutional players like pension funds, university endowments, family offices, and even hedge funds are all vying to get in on the action, creating what some see as a worrying environment for US farmland. The sector is heavily boom-bust, and some observers have commented that we’re closer to the latter. So where to go from here?
Time To Shine for Emerging Markets
As inflation drives up commodity prices, agriculture will see an uptick in value across the board. But not all regions will benefit equally. We’re looking at an environment in which emerging markets are poised to enter the global ag trade at an unprecedented scale.
For years, agriculture in emerging markets has lagged behind in terms of outputs, efficiency, market access, technology, and other factors.
But that’s changing. As global investors search for yield in an increasingly difficult environment, agriculture – and especially emerging market agriculture – has stood out for its untapped potential.
Indeed, EM agriculture is quickly leveraging new technologies, best practices, international trade agreements, and easier access to capital. With all of these factors combined, EM agriculture is shaping up to be one of the best plays for long-term appreciation and non-correlated yield.
Where to Look
But not all EM agriculture is the same. You have soybeans in Brazil, palm oil in Vietnam, cattle in South Africa…how to sort out the wheat from the chaff, so to speak?
Thankfully, we’ve created a guide for that. Check out Farmland 101 to learn more about due diligence, crop types, risk assessment, and more.
For now, suffice to say that current trends in agriculture favor permanent crops that fit well with healthy eating trends. Coconut, for instance, has surged in popularity over the past 10 years, becoming an integral part of value-added products like beverages and snacks. Healthy alternatives to conventional food products are a winning bet over the long term.
Macroeconomic Trends Favor Ag
For one thing, with nearly $10 trillion dollars in stimulus money given out over the past year, it certainly looks like some amount of inflation is inevitable. And inflation, as we all know, is negatively correlated to commodity prices. That means that ag yields will likely increase during the next economic cycle.
Emerging markets also stand to benefit. Although many were hit hard by COVID, the developing regions of the world have proven surprisingly resilient. As global investors begin to jump ship in developed markets, look for emerging markets to prosper.
We’re truly living in strange times, as we’ve all heard Paul Krugman say. But for those willing to think outside the box, that strangeness can be transformed into value. 2021’s macroeconomic outlook is bewildering indeed – but agriculture, among other sectors, stands to benefit tremendously.