Inflation & Disrupted Supply Chains

Our global economy has been through various waves of sweeping change since the start of the pandemic, including ongoing inflation in the US as well as disruptions to supply chains both at home and abroad.

As a farmland investor, understanding how these forces converge on the agriculture industry will enable you to better track and understand your portfolio’s performance. Though these disruptions are challenges to overcome, with challenge comes opportunity, so we wanted to share some perspective on how we not only see farmland being able to weather these challenges but also how it can be an ever-better addition to your portfolio in an era of widespread economic disruption.

Our team at FarmTogether prides itself on decades of experience in agriculture, as well as on our portfolio strategy and long-term mindset when it comes to planning for unique economic events like these.

Below, we’ve provided a brief overview of the leading trends we’re seeing affect the agricultural economy and an outlook for FarmTogether’s portfolio’s performance over the coming months.

If you have any questions, as always, please do not hesitate to reach out to our team - info@farmtogether.com.

__________________________________

How Inflation and Supply Chain Disruptions Are Related, and How They Influence the Agricultural Economy:

In recent months, we’ve seen inflation on the rise while also observing persistent shipping delays and shortages of a variety of goods. According to many economists, including those at the Federal Reserve, these phenomena are intertwined. Inflation that began as a knock-on effect of pandemic-era stimulus spending has morphed into a longer-term pattern of continued price increases driven by shipping container shortages, manufacturing delays, and an undersupply of inputs needed to make even some commonplace goods available at stores or online. The feedback loops that these concurrent trends have caused in the agricultural sector mirror those of the broader economy, including in how they originated.

A common refrain cited to explain the “Great Supply Chain Disruption” is that the pandemic caused an initial surge of shipments of supplies like masks, ventilators, and other medical supplies from China to the rest of the world. This came at the same time that many manufacturing facilities and ports were either closed or operating with skeleton crews. Though these closures have since lifted, the global supply chain has yet to catch up with the backlog of unshipped goods.

The pace of recovery has been largely dictated by shipping companies’ tendency to continue prioritizing export shipments from Chinese ports, above all other freight traffic, resulting in shortages of available shipping containers around the world. As a result, you may find that your local department store is short on a wide range of goods - or if you work in agriculture, that your preferred fertilizer vendor is short on supply.

In fact, prices for agricultural inputs - fertilizers, pesticides, and other additives farmers use to protect their crops - have been hit particularly hard. Thanks to delays in the manufacturing of active ingredients in many inputs and the languid pace of shipments, indices tracking these inputs’ prices have surged, surpassing their previous peak from 2008. A similar story can be told for many raw materials needed for farm equipment and infrastructure.

For farmers, this means that the costs of operations have increased. Crops cannot be kept healthy without these inputs, and as a result, the agricultural sector at large is having to absorb increased costs and input supply shortages, while still pressing ahead with the growing season.

Fortunately, however, macroeconomic trends like these often can have knock-on effects that could ultimately benefit the farm economy, some of which we have already seen evidence of this year. Diversifying your holdings by investing in farmland can still benefit your portfolio’s returns during times like this.

Outlook For Farmers, Consumers, and Farmland Investors

There is a well-known correlation between inflation and changes in the prices of commodities. Ultimately, increases in the prices of important inputs to the production of any good are likely to drive the price of that good upward. This is known as the “pass-through effect”, in that increases in the costs of input goods are eventually ‘passed’ to consumers of the final product. This has been documented throughout many sectors of the economy and has proven to be true of agriculture. In a year that has already seen inflation in food prices, a continuation of that trend may ultimately help farmers fetch higher prices for their harvest over the long run.

Still, marketing the crop is just as strategic an objective for farmers as growing it in the first place. Choices such as whether to sell into domestic or export markets, or to target buyers who will use the crop for fresh rather than processed consumption, can have an outsized impact on the price the farmer receives. Meanwhile, the choices a farmer makes to manage inputs during a shortage are just as pivotal - either by substituting alternate products or by purchasing multiple seasons’ worth of supply in advance of an accelerating shortage, a farmer can ultimately save a great deal on operating costs over the course of multiple seasons.

Farmland is well known as an excellent inflation hedge, with a history of good performance even under circumstances like this. Agricultural commodity prices are a major driver of farm income and are therefore correlated with farmland values, which have been on a strong upward trajectory thus far in 2021. With a 70% correlation with the CPI and a nearly 80% correlation with the PPI, farmland can be a great addition to any portfolio in need of inflation protection.

Inflation pressures in agriculture present farmers and farmland investors alike with both challenges and opportunities. At FarmTogether, we pride ourselves on taking an integrated approach to farm management that allows our portfolio to withstand and even flourish during disruptions like this and ultimately deliver superior returns to investors.

FarmTogether’s Approach To Portfolio Planning

With an eye to the future, FarmTogether has made several strategic moves to position each farm in our portfolio for continued success. Throughout the year, each of our on-site farm managers has an ongoing dialogue with their suppliers about the price and availability of certain products in order to secure the supplies they need as cost-effectively as possible. This year, that ongoing dialogue is all the more important, as supply chain disruptions affect different products as well as different growing regions unevenly. By coordinating among each of our on-site farm managers and their preferred input suppliers, we have moved to secure an ample supply of inputs for our whole portfolio in advance of a shortage in any particular locality.

Our team has also been busy investigating alternative products to use in the event of a prolonged input shortage. For example, many of our California farms are located near regions of significant dairy cattle production, and cattle manure can be a great source of nitrogen to keep crops healthy. Tapping into locally available supplies of manure and other composts or organic fertilizers will be a helpful fail-safe strategy for our operators.

On the marketing side of things, our team has prioritized relationships with marketing partners that will help us de-risk the sales of our farms’ produce. In perishable commodities such as apples, pears, and citrus, we have prioritized access to domestic markets for fresh consumption, as retail demand for food in the US has been reliable throughout the pandemic era. For non-perishable commodities like tree nuts, we have prioritized relationships with marketing partners who are able to sell our supply domestically or limit our export exposure to markets with few barriers to trade and limited container risks, such as Canada and Mexico.

Our employment of these strategies is a testament to our team’s decades of experience in all facets of agriculture. Finding creative solutions to challenges in pursuit of returns is core to our DNA and our values, and we will continue to lean on this approach going forward.

Farmland Can Help Protect Your Portfolio

In an era of disruption, farmland’s long-standing history as a superior inflation hedge and source of stable returns is perhaps clearer than ever. As we noted above, farmland values have surged this year, with several states seeing land sold at auction at record prices.

With a well-managed farmland portfolio, investors can both weather the ups and downs of supply chain shocks and inflation spikes as well as capture the upside that results from those trends. Diversifying with leased farmland can provide your portfolio with protection from direct inflation exposure, while direct-operated farms can help you capture the pass-through effects of inflation in commodity prices down the road. Overall, farmland investing remains an excellent way to build your portfolio with the future in mind.