The sun rises behind a corn tassel in a field in Minooka, Illinois, September 24, 2014. (Photo: REUTERS/Jim Young)
How a trade row may split the fortunes of two U.S. farm companies
by David Randall
NEW YORK (Reuters) - The threat of steep tariffs on soybeans, wheat and corn from an escalating U.S.-China trade dispute may decide the survivor among the two largest real estate funds in the hard-hit U.S. farm sector.
Farmland Partners Inc (FPI.N), a $251 million market cap real estate investment trust that owns more than 166,000 acres of farmland, appears to be more vulnerable to the effects of a trade war than its largest publicly traded competitor, $186 million market cap Gladstone Land Corp (LAND.O).
That is because while Gladstone Land has focused primarily on so-called permanent crops such as oranges and almonds that grow on trees and vines, Farmland Partners has roughly 60 percent of its portfolio in row crops such as soy that China included in its April 4 list of retaliatory tariffs against the United States.
Roughly 35 million tonnes of U.S. soybeans imported each year by China will now face an additional 25 percent import tax. Soy futures Sv1 plummeted 5 percent on April 4, the day the tariffs were announced.
With its concentration on farmland that produces soy, Farmland Partners is “the most likely to be in the crosshairs of China” and may have more difficulty passing on rent increases to its farmer tenants than Gladstone Land, putting its dividend at risk, said Robert Stevenson, an analyst at Janney who covers both companies.
Paul Pittman, the chief executive of Farmland Partners and one of its largest investors, told Reuters in an interview he thinks his company’s stock is undervalued and that chief competitor Gladstone Land is spreading misinformation about the challenges facing row crops.
“Our company is misunderstood,” Pittman said.
When asked for comment on Pittman’s allegations, David Gladstone, Gladstone Land’s chief executive, told Reuters: “We have no idea how the tariffs will impact them.”
His own company, meanwhile, focuses mostly on perishable berries and vegetables that are not shipped to Asia and organic almonds that have little export sales, Gladstone added in a statement.
Higher trading costs would only add to the challenges facing U.S. farmers. Before the tariffs were announced, the United States Department of Agriculture estimated in February that inflation-adjusted net farm income would decrease 6.8 percent, or $6.7 billion, this year, to its lowest level since 2009. Those declines would mark the fourth-straight annual loss for the sector, which has been undercut by rising interest rates and high land prices.
Between 2003 and 2013, the average acre of farmland in the United States jumped 213 percent in noninflation-adjusted dollars, according to research by Brent Gloy, an agricultural economist at Purdue University, an average annual increase of 12 percent. Prices have stalled since, up just 1 percent over the last four years.
The twin impacts of rising tariffs and rising interest rates have taken shares of Farmland Partners down 10.6 percent for the year to date, compared with an 8.4 percent decline in Gladstone Land and a 0.1 percent decline in the broad S&P 500 .SPX.
BETTING ON A ‘TABLE POUNDER’
Farmland Partners, which at $7.50 per share trades 46 percent below its April 2014 initial public offering price of $14, was the first dedicated farmland REIT in the United States and launched near the height of the farmland boom.
“A lot has changed since the IPO: crop prices dropped, there’s a discussion of tariffs, and the capital markets haven’t been as supportive,” said David Rodgers, an analyst at Baird Equity Research who lowered his target price for the company on March 5. “You would need to see some cash flow growth and dividend growth to give confidence to investors that the business is on the right path and is healthy.”
Pittman, who in addition to being chief executive is one of Farmland Partners’ largest investors, said tariffs will not affect the company as much as the market expects.
“The downside in the near-term is probably muted because frankly the world needs to eat,” he said in an interview.
Gladstone Land, meanwhile, is more exposed to policy risks than Farmland Partners because its crops are more dependent on migrant labor, Pittman said.
“If someone figures out how to get spinach from Mexico to the U.S. cheaper - when we know that growing costs will be half of what it is here - then it will crush (Gladstone’s) portfolio,” Pittman said.
Joel Beam, a senior portfolio manager at Salient Partners (FFREX.O), said he has a position in Farmland Partners in part because he believes that Pittman is a “table pounder” who will continue to make a case for his company despite the mounting threats.
Pittman “is pretty vociferous about its value, which is a refreshing thing,” Beam said.
While Farmland Partners purchased $110 million of almond, pistachios and walnut groves in California’s Central Valley in September, Pittman said the company is not going to deviate from its strategy of owning predominantly row crops because of the threat of tariffs.
“Our stock is horribly depressed,” he said. “We have a good business but a bad stock price.”