The Four Trends That Will Drive Farmland Prices in 2023
2022 has been particularly agitated for energy and asset prices.
As I am writing these lines, the S&P500 has lost 20% since January 2022.
Demand for mortgages has dropped 86% in the US compared to one year earlier, which leads many to think that a sharp decrease in real estate asset prices is expected.
Oil is at $90 per barrel after reaching $120 in March.
Gas has also decreased significantly in Europe from a high of €340/MWH in August, to €110/MWH, which remains expensive given that €30 would be considered a high price in 2018.
What about farmland?
Farmland has remained steady since its jump in value in February 2022.
We have spotted four trends that will influence the price of farmland in 2023.
1. Inflation and Interest Rates
As the world is seeing record levels of inflation, central banks (led by the US Fed) have no choice but to increase rates to decrease the volume of money in the economy to decrease consumption in general.
As money is getting expensive, everyone reduces their purchase, which reduces everyone’s income, which reduces consumption in general, which reduces inflation.
Understand: governments want everyone to consume less (and produce more, albeit they don’t always understand that ;)).
While in general, inflation is caused by overconsumption due to excessive money printing (aka credit), the situation we’re in is quite unique as it has partly been caused by energy shortages due to the sanctions imposed on Russia following the war in Ukraine.
It’s obvious that inflation was bound to happen with the extensive money printing we have seen in 2021.
However, it has been widely exacerbated by the lack of energy.
As a result, prices won’t come down before we find a long-term solution to energy shortages.
What does that mean for farmland?
The price of farmland follows the price of food which follows both the price of energy and general inflation in the economy.
As prices remain high, the price of farmland will remain high too.
2. The Energy Transition
The energy transition is in everyone’s heads at the moment.
The problem is that it’s not as simple as it seems.
There are roughly three trends that influence the energy transition.
- Nuclear: nuclear energy is clean and cheap to produce. I will leave it to experts the question whether it is safe or not. While certain European countries have decided to close down their nuclear power plants, others like Sweden have decided to build more of them.
- EV: the shift to electric vehicles is unlikely to happen before 2035 like the EU would like to. The power grid cannot at this stage sustain a complete shift to EV, and countries barely have the capacity to generate enough electricity for EVs anyway. These would require massive investments, but as interest rates raise, they’re unlikely to happen.
- Renewable: the problem with renewable energy is that it’s not as reliable as we would like it to be. When the temperature drops, wind turbines freeze. When the sun sets, solar panels stop producing. In both cases, recycling is extremely difficult and unsustainable. “Green” isn’t always what it sounds like.
What does it mean for farmland?
As energy prices remain high, so will the price of farmland.
3. The War in Ukraine
As we highlighted when the war started, Ukraine produces and exports a considerable amount of food both to Europe and to other countries like Turkey and Egypt.
Until Ukrainian farmers can go back to their fields safely, food prices will remain high and farmland, a scarce asset.
As a result, we can reasonably assume that European farmers will try all they can to increase their production.
This should in turn increase yield and further push-up farmland prices.
4. The New Global World Order
The new global world order is being shaped by two trends.
1. Western decoupling from China
The US (and Europe, to a lesser extent) have made clear that it desired to leave China, bring back factories to their continent, and take back control over their supply chain.
This means that the West and China have fewer and fewer common interests with one another and will grow divergent as time goes by.
2. The Democratic West VS the BRICS
The BRICS club, which was supposed to mean Brazil, Russia, India, China, and South Africa, is getting bigger.
Saudi Arabia and a range of other countries have asked to join the group which is now trying to create a currency to stop having to use the USD as a global currency exchange.
What separates the West from the BRICS?
Democracy.
Western nations don’t hesitate to impose economic sanctions on non-democratic countries when they go too far.
This leaves these non-democratic countries to seek other economic partners that will not meddle in their internal affairs.
They found this economic partner in China.
As a result, we will increasingly see in the future the world assembling into two groups:
- USA-Canada + Europe + South Korea + Japan + Australia-New Zealand
- China + Russia + Saudi Arabia + India.
Many countries remain on the fence.
While they’re not completely democratic, they don’t trust either Russia or China.
Brazil under Lula, for example, is more likely to engage with the West. Brazil under Bolsonaro isn’t.
This principle remains true for South America (and not Latin America, since Mexico and the countries under it are likely to follow the US) and Africa.
What does that mean for farmland?
As economic interests diverge and the exchange of goods and services halts, countries will have to increasingly rely on their own production capacities.
Technically, it means that the farmland market may become smaller.
5. Risks
It’s 100% certain that we’re now in a recession, but the impact on prices remains to be seen.
As we have been highlighting since starting this blog, what makes farmland such a beautiful asset is that it produces food which people need to eat regardless of the economic situation.
Could farmland prices go down? They could if demand decreased.
But as the Ukrainian war continues, demand for farmland is unlikely to decline. The same can be said for the price of food.
We’re likely not going to see the formidable increase in prices from 2022 anymore, which isn’t a bad thing.
But as food security remains threatened, we’re unlikely to see any type of decrease in value.
Conclusion
When I was a student, I was living in Rotterdam, Netherlands and lived on €700/month.
My rent cost €290 and my food, roughly €250.
The age of “cheap” is over.
On one hand, the price of energy is unlikely to decrease.
On the other, workers around the world demand to be paid more.
As people are losing their jobs, demand for various goods is likely to significantly drop in the following months, which will decrease the price of assets selling them.
There are only a few assets that are unlikely to decrease in price, and very likely to increase, in fact.
- Arm and defence companies: the age of peaceful economic relations from the 2000s is over.
- Oil and gas companies: it will be a long time before we can offset Russia’s gas and oil production by our own means, especially without the help of nuclear energy.
- Farmland: as:
- farming yields increase
- energy remains high
- farmland remains scarce
- local production is favoured
Farmland’s value is highly unlikely to decrease in price in 2023.
Interested to invest in farmland? Visit landex.ai today.
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