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[ MARKET VIEW ] T he U.S. Department of Agriculture announced in August it planned to distribute $4.7 billion to farmers as part of the initial wave of a $12 billion aid package. Farmers themselves seem less than thrilled with the bailout, with the prevailing sentiment that those dollars are flowing to larger agricultural conglom- erates. Sen. Ben Sasse (R-Nebraska) may have summed up the general sentiment now swirling throughout many farming communities when he told CBS News that farmers and ranchers in his state don't want more bailouts, but the ability to sell overseas. While much of the media coverage has focused on the political dustup resulting from the move, the new tariffs also put a renewed spotlight on some of the major issues facing U.S. agriculture. Even before the tariffs were announced throughout the spring and early summer, the industry was experi- encing serious headwinds. Soybean prices, for example, dropped 19 percent to a 10-year low while corn fell more than 15 percent, according to CBS News. Additional tariffs are likely to exacerbate the pressure on farmers. But there are additional and more macro challenges facing the industry. Farm incomes hit a 12-year low in 2018 at $59.5 billion, while farmer profits are expected to drop 6.7 percent, according to the U.S. Department of Agriculture. e reality is the majority of U.S. farms are not pro- ducing at their full potential due to a variety of factors, ranging from lack of capital resources and expenditures to generational issues. To meet the growing demand from the global expansion of the middle class, agricul- tural supply must increase and commodities need to flow freely. However, fueling a rise in global supply is predicated on the appeal the agricultural market holds for investors who are willing to ride the wave. ATTRACTIVE ASSETS Despite what could be the nascent stage of a full-blown trade war, the farming sector possesses two characteris- tics that make it particularly attractive to private inves- tors with experience in the sector looking at the long term. One key factor is the potential for economies of scale centered on small farms. About 90 percent of the nation's 2.1 million farms are characterized as "small family-run" operations, which both increases the finan- cial risk and limits farmers' ability to reinvest in the busi- ness. What's more, up to three-quarters of small firms have profit margins of less than 10 percent. However, thin margins could serve as a catalyst for selling the land to an operator with greater economies of scale and sub- sequently wider profit margins. Another major factor concerns the structural issues surrounding farmland ownership and the demograph- ics of many owners. Family-run farms operate about 51 percent of available farmland in the country, but account for just 23 percent of production. Compare that to just 3 percent of farms considered "large-scale family farms" that account for 45 percent of production. Trade tensions Tariff war places sharper spotlight on challenges facing farming sector Fueling a rise in global supply is predicated on the appeal the agricultural market holds for investors who are willing to ride the wave. By Jim Gasperoni 26 REALASSETS ADVISER | D E C E M B E R 2 0 1 8