The following excerpts from a conference call with economist Mark Dotzour PhD, Peoples Company president Steve Bruere, and Land Report editor Eric O’Keefe have been edited for content and clarity. An audio file of the conversation is available at the end of the post.
By The Land Report • March 23, 2020
Eric O’Keefe: What similarities and what differences do you see between the effects of the COVID-19 pandemic on markets currently and the global financial crisis of 2008?
Mark Dotzour: This feels like we’ve got way more than 2008. I feel like we’ve had an exogenous shock that was unexpected. We used to call those black swans 10 years ago. A black swan is something you can’t forecast and has a low probability of happening. But if it does, it has an enormous amount of effect on the economy. This COVID virus is definitely a black swan in its full form. [With] this black swan, you’ve got a combination of two things. You’ve got a supply chain problem because most everything we buy comes from China, and so we have a supply shock. At the same time, we have a demand shock when everybody has to close down their business sand stay in their home.
The distress in the financial system is just about as intense, if not more intense, than it was in 2008 when Lehman Brothers and Bear Stearns got into trouble. I don’t think there’s any question about it. The very foundations of the banking system, in the US anyhow, is kind of shaky. The foundation’s not broken but the building is shaking, just like it was in 2008, and so this is a very serious situation economically.
Eric O’Keefe: What do you think we might be looking at as far as markets, as far as liquidity, as far as the day-to-day economics of it nationwide in six months?
Mark Dotzour: Before this black swan appeared, the [US] economy was very strong. It was slowing down a little bit because the expansion had lasted 11 years, but it was still the strongest economy on earth going into this. The problem is there’s also a lot of debt. I’ve been warning investors, in real estate in particular, for the last two years. It’s okay to buy real estate, but just don’t put on too much debt so if we ever get into a problem, you can cut rent or you can have a lower occupancy rate and still keep your property. And that’s the key issue right now.
I think the economy was super healthy before this happened, so I kind of applaud the government for trying to keep the pieces in place so that you’re going take a 90-day timeout. And then hopefully, at the end of 90 days, you start to resume what was the strongest economy on the planet at that time.
Eric O’Keefe: What were you seeing from a farmland perspective nationwide?
Steve Bruere: The farmland market was pretty resilient heading into spring. We had a lot of great transactional volume. So we were geared up to have a great year. Low interest rates are obviously bullish for farmland.
Eric O’Keefe: What kind of smart money do you see coming in or going out of the [farmland] market?
Steve Bruere: Our intuition was with low interest rates and the printing presses running that we would see a lot of folks rush to farmland as a safe haven and an inflation hedge. And some of the folks that we represent that were farmland buyers three or four weeks ago have really put the brakes on as they’ve seen other opportunities. Where we’re at right now is with equities trading at a discount and bonds trading at a discount, people are tempted to seek higher returns elsewhere.
In the short term, people are sitting on their hands. A 3 or 4 cap rate on farmland just doesn’t look that exciting when you can buy the equity markets where they’re at. So a lot of the family office-type capital that we represent is not jumping into farmland right now. But we’re also seeing some of the life insurance companies that we do business with look at this as a safe haven investment and want to put some money into it.
There’s some folks that have never even thought about farmland before that are calling my office and asking questions about putting some money into the market as well. So it depends what type of capital you have. It depends what stage of life you’re in. We’re seeing all sorts of different reactions.
Eric O’Keefe: You mentioned that you actually had some long-term farming clients come to you looking to possibly get out of some of their holdings so they could get into the equity markets because of the opportunities that are going to be presented in the next 30, 60, 90 days.
Steve Bruere: That’s always been one of the objections we faced: If I sold my farm, where would I put my money? We had an old boy call us last week who said, “Hey, I’m wanting to sell some farmland. Equities are on sale, and my farm has held its value. I want to sell the farm and move it into equity.” That was the first time I’ve seen that, where people have seen a discount somewhere else that was more attractive than their farm. They were willing to sell and potentially pay capital gains and move into another asset class.