CMR Bonus | Tariffs, Land and the American Farmer

Craig Lemoine: 00:00

Thank you so much to tuning in today to a pretty exciting, relevant, timely Land and Everything Else podcast, and also a a farm doc production. So we're we're getting two birds with one stone here. So thank you everybody. You know, the coolest part about hosting a podcast is bringing in people who are experts on a topic. And today we're able to do that.

Craig Lemoine: 00:24

And so we're bringing in three experts in agriculture tariffs. And we're gonna have a conversation today about tariff impact on ag, on farming, on commodities. It's gonna be an amazing convo. I'm gonna be mostly quiet in it. This is not my area of expertise, but we do have some experts here joining us.

Craig Lemoine: 00:44

And so first expert number one, we've got my co host on land and everything else, Ailey Elmore. Ailey, thank you so much for joining us today.

Ailie Elmore: 00:51

Thank you, Craig. I'm really excited. It's a very topical issue that I know a lot of our listeners as well as a lot of our students at the University of Illinois are very interested in us discussing as well as our farmer partners and things like that. So we're excited to do it.

Craig Lemoine: 01:05

Absolutely. Thank you so much. And we've got Doctor. Bruce Scherer. Bruce, thank you so much for joining us again.

Bruce Sherrick: 01:10

Glad to be here. Every semester, we have one thing that we can kind of use to focus students' attention. And if I were to pick anything this semester, it's obviously tariffs.

Craig Lemoine: 01:19

Well, thank you very much. And the one and only Steve Bruere. Steve, thank you so much for joining us.

Steve Bruere: 01:24

You know, it's always a pleasure. And when you say tariff expert, I don't know if anybody can really call themselves a tariff expert, excited to pontificate over all the thoughts we all might have today.

Craig Lemoine: 01:35

So I'm pretty much gonna sit back from my perch in the wealth management financial planning space and kick this over to my co host, Ailey Omar. Ailey, it's all yours.

Ailie Elmore: 01:45

Awesome. Well, I'm really excited to get to talk both to Steve and with Bruce, two close friends of mine and mentors of mine as well. To talk a little bit about the historical context of tariffs, that's kind of where we're going to start this conversation. Look at kind of the current agricultural landscape pre 2025. And kind of what the status of global agricultural trade was like.

Ailie Elmore: 02:09

And then now under the current administration, what are some expectations around agricultural production, exports, imports, our overall trade deficit in agriculture and just general sentiment of farmers, growers, institutional investors, anyone that's involved in the agribusiness space. So that's kind of where we're going with this conversation. But like I said, I want to first start on the historical context of tariffs. And, you know, Bruce, I want to pose this to you first, as you know, the economist here in the room. And, you know, there's been a lot of conversations about the Smoot Hawley Tariff Act of 1930.

Ailie Elmore: 02:49

And just this overall view of protectionism that kind of really started with that I see a lot of literature being put out referencing that specific piece of legislation during, you know, the era of President Hoover. Can you kind of talk us through, you know, what was happening during that time? Obviously, you know, the Great Depression was going What led to that piece of legislation and then kind of where we have gone after that in terms of global trade and opening up trade barriers?

Bruce Sherrick: 03:22

Sure, can. And again, Steve, chime in as well. And Craig and Ailey, obviously everybody join in. I think with all historic events, you end up reprocessing and reinterpreting through the lens of the current question, right? And the Great Recession didn't really start because of Smoot Hawley and didn't really end because of something else.

Bruce Sherrick: 03:41

But there were a lot of factors going on at that point in time with the Federal Reserve and the monetary policy in the country that led to a little bit of a, you know, monetary issue, I guess, if you will. And Smoot Hawley was brought on with an express intent to protect agriculture, And it was a massive backfire, and and predictably, other countries raised counter tariffs, the prices go up. And one thing that's sometimes missed is that it's not really a a disputable point, that if you simply ignore the comparative advantage and the costs go up for everybody, everybody has less to spend on other things. So I think it's a little bit wrong to focus only on agriculture with smooth poly even though it's how it was focused. Mhmm.

Bruce Sherrick: 04:23

And the the spillover effects to everything else kind of exacerbated the Great Depression. But it led to lots of other things too. We ended up, you know, post World War, Bretton Woods and some other agreements that started to create a framework to kind of undo the asymmetries that would be caused by one directional or two directional or two at a time tariff policies. And we got through a period of time, and we'll get more into that in a minute. But I think Smoot Hawley was sort of a little overly simplified idea that got out in front of itself.

Bruce Sherrick: 04:54

Not much historical debate about whether it was a good or a bad idea, but it was one of the first very large, very broad applications of tariffs. There are a couple of other historians, economic historians who try to catalog things. And there are a couple hundred examples of tariffs around the world through time. Holly just is the one we happen to point to because especially when we're talking about agriculture had those words in its title as well.

Ailie Elmore: 05:19

Yep, absolutely. And from your view and kind of more of a historical context, after that, after maybe for a second world war, you know, what kind of changes did we see internationally amongst trade, free trade, reduction of trade barriers, kind of where we were maybe, you know, pre February?

Bruce Sherrick: 05:40

So I think you have to and again, this may get a little geeky or wonky or or sound a little technical, but Bretton Woods, where we had a fixed exchange rate among currencies, is really critical to remember existed because it doesn't exist now. And so when you have two balls tied together and you pull on one, the other moves. Sure. When you cut that chain, you pull on one, other doesn't move. So the way of interpreting tariffs with and without fixed currency exchange rates is dramatically different, of course.

Bruce Sherrick: 06:07

Absolutely.

Ailie Elmore: 06:07

Post

Bruce Sherrick: 06:09

World War II and sort of Bretton Woods and an agreement to essentially use the dollar as the denomination for international trade, structured that system so that we still do it to, you know, as a matter of both convenience and importance, we still use the dollars, the currency for most international trade. And if you can convert everything to its dollar equivalent, then you can trade in those other two currencies. After that, we then went through a period in GATT, G A T T, General Agreement on Trade and Tariffs, came into play. And then after that, that eventually morphed into the World Trade Organization. And so this is thousands and thousands and thousands of different individual contracts and negotiations that generally was a framework for keeping one side or the other on your way toward lower tariffs or lower trade barriers, keeping one side from getting out of line with the other.

Bruce Sherrick: 07:00

So there's even an adjudication system if you bring a complaint around GAPT or WTO to say third party come in and says, no, the effect of your behavior, protectionism or the opposite, had an asymmetric effect in this trade relationship. The idea though, I think, with now eighty years of experience was to facilitate productive trade and to try to find a way where if I were trading with you and you were trading with Ailey, we didn't have a way of disadvantaging you by creating a third mechanism for trade. That has probably been the longest era of sustained increase in productivity, and different countries experience that differently based on where they are in their growth channel. But I think it led to the situation today where we got to the point where we could almost not even tell what a tariff was because generally they're very low. And so it feels like a very blunt instrument now to hear tariffs being re proposed at levels that were higher than ever, but higher than even used in early twenties and thirties.

Craig Lemoine: 08:08

Okay. Thank you. Great. It was a great history. Well,

Bruce Sherrick: 08:13

full of holes too. Mean, that's a

Craig Lemoine: 08:14

Well, that's

Bruce Sherrick: 08:15

a two minute response to a question that's being debated and written about carefully and studied now at a much greater level of detail. And

Ailie Elmore: 08:23

you're bringing up a lot of points about currency exchange. And as we think about the dollar pre 2025 really had become a really strong reserve currency for the rest of the world. And so I want to come back to that conversation later on, kind of where we're seeing the dollar move currently, because I think it's an important conversation to have. But let's go ahead and kind of talk about Trump's first presidency. And Steve, I want to get your viewpoints here as well.

Ailie Elmore: 08:52

You know, he's famous for starting, you know, what we call the the trade war with China in 2017, '20 '18. You know, from your perspective, Steve, you've really got kind of the boots on the ground perspective with farmers both and institutional investors. You know, what were some of the repercussions of that initial trade war with China? And, you know, what kind of lasting impacts has that had on US Agriculture?

Steve Bruere: 09:20

Yeah, I mean, a big, a big part of the last tariff round of tariffs was the market facilitation payments that came into farmers. And Bruce probably has this data. I know we've used it in some slides. But Bruce helped me out on this, but it was something like $8,000,000,000 of payments that went into like Iowa farmers pockets. And it represented more than the entire amount of land that transacts on an annual basis when those payments came in to farmers.

Steve Bruere: 09:48

And I think one of the things that's kind of interesting about where we sit today is you've got this whole Doge task force happening alongside the tariff conversation. Whereas on the last go round, you know, you you just had the tariff conversation of itself. And, you know, Bruce and I will will have some phone calls on our way home from work once in a while and we'll debate, you know, whether tariffs are a good idea or a bad idea. And I think the challenge this time around is all of these different policy issues happening all at the same time. I don't think there's any historical context for it all kind of getting thrown in the mixing bowl together.

Steve Bruere: 10:23

But I would argue that the last round of tariffs, depending on which part of the country you were in, depending on what kind of crop you were growing. I know for farmers in the Midwest that the last round of tariffs because of the market facilitation payments were actually ultimately a bullish factor for farmland values. And and that bled into, of course, COVID as well and the Ukraine war. And so there was all sorts of other things that kind of tied into that. Maybe bailed out some of the tariff decisions because you had some of those other geopolitical and economic issues hit.

Steve Bruere: 10:58

So it's hard to maybe look at that last round of tariffs and come out with a clear compute or clear clarity on on on how that would have went if you took away Ukraine and you took away COVID. But by and large, I'd say it was it was it was a positive for farmers. And that's where I think, a lot of farmers, while there's some anxiety right now around these current round of tariffs, I think there's a little confidence that it's in the Americans' best interest to not break farmers and to, you know, ruin our agricultural productive capacity in The United States. And I think there's some confidence that there'll be some payments again. And again, think what's different this time around is we don't know how Elon and Doge fits into that.

Ailie Elmore: 11:45

Yeah, absolutely. It's just really hard to isolate the effects of the tariffs alone just because of all the other legislative changes that we we've seen. So, Bruce, I don't want to start a debate here, but I kind of do. What do you think? Do you agree with Steve's points on it was an overall positive?

Bruce Sherrick: 12:01

So the amount of direct payments made in response to the direct price effects times the quantity clearly overpaid farmers for the losses of the price and the export. Very distributionally important to recognize, though, that down the Mississippi River versus Western path out through Portland, those effects were dramatically different. Right? So whether or not you were sending your exports to China or not. So it did create bit of a, you know, winner and loser kind of problem.

Bruce Sherrick: 12:31

And if you're going to create a cost and then you subsidize, you have to ask where that subsidy came from as well. And so I think it does depend on where you draw the box. For farmers, the MFP payments were clearly bigger. For consumers, CFP payments and coronavirus payments were actually bigger than the total amount of lost wages. And so you can look at this question of, if you wanted to subsidize a particular industry, what's the most efficient way to subsidize it?

Bruce Sherrick: 12:57

And putting a tariff on washing machines isn't a very good way to subsidize local washing machine producers. It turns out you should just pay local washing machine producers. So I think this is very much, as Steve said, where do you draw the box? Where do you say we want to evaluate the complex set of things that are going on together to say good, bad, indifferent? Tariffs on their own don't have much of a debate.

Bruce Sherrick: 13:20

Among serious economists, there's just not much room. We don't debate that lightning isn't being thrown by bearded men sitting on clouds anymore. We can actually track flows. When you have floating currency, you can measure responses quite accurately to certain things. And I think this longer term growing where we're going to grow and consuming where we're going to consume is another reality that we have to face.

Bruce Sherrick: 13:45

And so I know you're talking about the trade deficit in agriculture in particular. And we've gone from a net exporter, kind of jumping ahead to your questions if I Yes, it's okay. Kind of a net export of agricultural products to a net importer. But remember that we're now importing blueberries all winter long because we want to consume fresh fruit and a lot of the imports are horticultural. And when you talk about coarse grains or things grown in the middle of the country around the agricultural land we're most concerned about, that's going for feed uses, energy uses, a little bit of direct consumption, but it's going into products that essentially create a food system around the world.

Bruce Sherrick: 14:24

So you have to take the soybeans from Brazil or Iowa or Illinois and the corn from Brazil or Iowa and Illinois and get it to the parts of the world where it's consumed. That's a question that I think backdrops this if we have a trade war with China and agriculture is one of the things that gets hurt. Can you afford to pay for that or not given the the reduction in total gains that both economies have to face? Now you you can you can beat up China or not beat up China, and China can try to beat up The US or not. All of those individual decisions on the tariff, again, where you draw the box matters.

Bruce Sherrick: 15:01

If we're just talking about agriculture, secretary Rollins has already made very strong statements saying, protect the farmer base. It's a very strong and important component of Trump's base. And so that makes sense probably then to support that. If you had an industry that wasn't in that category, you might choose to let that industry falter, for example. So I think that's kind of fumbling on the end of the sentence here, but I think it's important to both decide what you're talking about when you say tariff, what you say agriculture, what you say with the trade balance.

Bruce Sherrick: 15:37

A trade balance, a deficit or a surplus is clearly neither good nor bad. It just depends on where you have relative advantages for producing things. And historically, we import a lot from countries that have lower standards of living because they have excess wages relative to the level of wages commensurate with our average standard of living. And we tend to export things that we either have strong comparative production advantages on or that we have endowments in some form, whether it be financial services or other things that as the, you know, as The US has gotten richer, we've moved away from manufacturing to higher valued uses of labor. Those questions are all also wrapped around the same axle.

Ailie Elmore: 16:19

Yeah, no, absolutely. And you are bringing up my my next few points. That's great. You're setting me up very nicely. You know, pre 2023, we were operating under a agricultural trade surplus.

Ailie Elmore: 16:31

We're currently operating under a 39,000,000,000 trade deficit in agriculture. And as you mentioned, a lot of that is coming from the horticultural side. So your fresh some of your fresh fruits, blueberries, your floriculture things, coffee, cocoa, things like that are coming from, you know, are those countries that have more suitable climates and they're higher value things as well, which I think some people forget versus corn and soybeans, which are considered to be we love them, but a little bit lower value to a commodity product. So when we kind of talk about pre let's let's move into this timeframe of 2021 to 2024. And we talk about the overall health of the agricultural sector, maybe from a grading perspective.

Ailie Elmore: 17:18

And I'm going to ask you this, Steve, if you were to grade the overall health of the agricultural sector in pre 2025, you know, post COVID or I would say, you know, 2021 to 2020, you know, pre 2025, what would you grade the agricultural sector and why?

Steve Bruere: 17:38

Yeah. And, you know, this is actually going back to the last question a little bit and and and what Bruce hit on is there's winners and losers. So, was talking about the MFP payments and how that benefited folks in the Midwest and who didn't benefit was permanent crops, almond farmers in California, for instance, who suffered greatly under the last tariff program. And so, when you're grading the whole agricultural sector, you know, if you're in the apple business, you're probably not real excited right now. If you're in the almond business, you're probably not real excited.

Steve Bruere: 18:13

But when you were growing corn and soybeans or you're in the cattle business, that was a pretty good spot to be. So I think I think there's, you know, the overall health coming out of COVID was was really strong. Commodity prices were high and interest rates were low. And, you know, we had all those factors. There's limited amounts of leverage in agriculture.

Steve Bruere: 18:34

And so I'd give it a, you know, an A, A minus or an A. I think it was a pretty strong sector. But as as you know, things can change pretty quick in these commodity price cycles and with interest rates and you can move from feeling frothy to not so frothy pretty quick.

Ailie Elmore: 18:51

Yeah, we definitely experienced that in the last few weeks.

Craig Lemoine: 18:54

Sure.

Ailie Elmore: 18:55

Just in general. In general. Right.

Craig Lemoine: 18:57

And in general stocks, bonds, everything.

Ailie Elmore: 19:00

Yeah. Portfolios are constantly changing. Interesting time.

Craig Lemoine: 19:05

Sort of a reset on goals a little bit.

Ailie Elmore: 19:06

Just a bit. So let's kind of talk. Let's talk in 2025 terms in current terms and looking at the current tariff landscape, which is a bit hard to decipher as we you know, it's kind of up in the air from day to day, week to week. I want to separate the conversation and kind of first talk about the input side of the equation for producers. You know, when we think it's April right now as we're having this conversation, my family will start planting hopefully this weekend.

Ailie Elmore: 19:37

And a lot of growers are beginning to have planting season begin and thinking about buying inputs if they haven't already locking in pricing. So on the input side of the equation, maybe Bruce, let's talk about some of the major inputs that we import into The United States.

Bruce Sherrick: 19:57

And again, headlines tend to exaggerate everything and the demise is exaggerated, the recoveries are exaggerated. And if you look at the economy in general first, we import about 11% of the GDP export about 9%. In agriculture, it's a little bit higher on both ends of that because of the reliance on fertilizers that are not necessarily easy to build in The US or mine in The US or, you know, nitrogen comes from a lot of places, but not all of it, just The US and steel. But these are also long term industries, right? So putting on a 20% tariff on something that represents 20% of your inputs is a 4% change in cost.

Bruce Sherrick: 20:37

Much of it was, as you said, already contracted. So I think it's important to recognize that human cry and the fire and the fear is never as good or as bad as the headlines might suggest. Sure. At the same time, it's hard to recover once you lose a supply chain. And so the Ukraine war effect on fertilizer to South America was really oversized because that's where a lot of the fertilizer came from.

Bruce Sherrick: 21:03

And for us, a lot of it comes from Canada and The US. So there are things like that that we use to illustrate. But I think the total complex, seed is a really big part. Seed doesn't necessarily have the impact of a tariff built into it because of where seed is grown. Steel, it takes a long time to wear out a tractor.

Bruce Sherrick: 21:23

So if you do have a significant impact on steel and manufacturing industries, That's a very long term effect.

Craig Lemoine: 21:29

Yeah.

Bruce Sherrick: 21:29

It can still be devastating. But the inputs do proxy for a lot of other things because input costs and output values determine all the other things in between like rents and values, and the land value has to eventually represent what it can earn. Steve was exactly right. The differential effects on things like permanent crops and row crops were really palpable. The differential effects going forward with the set of payments or offset payments or crop insurance program changes or whatever is important to recognize because, again, for folks who haven't seen it, PharmDoc has an incredible library of things related to policy and policy payments.

Bruce Sherrick: 22:09

And what's happened since essentially Trump won, not just post COVID, is we've moved to a very ad hoc payment system for agriculture. And we've, in most cases, more than made up for what you would say are the losses from things that were either externally imposed or internally experienced or oversupply or loss of a market or whatever the versions are or changes in RFS and so on and so forth. So put it all together and the input complex is important but pales in comparison to what you can sell your final. The value of the commodity is what people are really going to focus on when it gets to the end of the day.

Ailie Elmore: 22:47

Yeah, no, absolutely. And you're bringing up just lots of good things, especially on the subsidy side of things. And as we look, we have moved to more ad hoc style payments and support to farmers. And, you know, there's lots of questions about whether that's sustainable in the

Bruce Sherrick: 23:02

long run.

Ailie Elmore: 23:04

But Steve, I want to talk to you. I keep putting you as the producer side of things, but I think that you have a great perspective from people's companies perspective as both the land management side, asset management side and the institutional investing side. On what you're seeing maybe in Iowa and your commodity growers, how are they changing their decisions when it comes to input contracting because of these tariffs and what they're concerned about in long run. It's really it's a lot of them have contracted already for this year, but maybe looking, you know, a couple years down the line, how might they start changing their decisions?

Steve Bruere: 23:47

Yeah, that's a great question. And to your point, I mean, we're already into the planting season, so it's too little, too late to really adjust for 2025. '1 thing I wanted to comment on was that your crop insurance price for corn and soybeans was set in February. And so if you're a farmer right now, feeling anxiety about the tariffs, Bruce, what was it? $4.70 was your February crop or corn price for crop insurance?

Ailie Elmore: 24:17

$4.74 70.

Steve Bruere: 24:18

I think it was right in there. And so, you know, if you're a farmer, you're going into this year's growing season, kind of knowing what your floor is relative to that February crop insurance price. And know, some of the realities of what this means long term, and by the way, two weeks ago when we started hitting the world with these tariffs, corn went up on that Thursday and that Friday, right? And so, you know, I think there's just a lot of people that maybe there should be some strategic planning around what they're going to do for inputs on a go forward basis. But I think there's more optimism that this settles out before they need to make a fundamental shift in how they make business decisions moving forward.

Steve Bruere: 24:59

And you've got that for crop insurance to protect the 2025 growing season. So I think some of the things you're thinking about are probably going to be more relevant a year from now if we haven't resolved the tariff situation than they are today.

Bruce Sherrick: 25:13

I want to put two punctuation points on what Steve just said around crop insurance. Was I of did my fumble response because I thought you were going to the point all you said is correct. In addition, we upped the subsidy that we paid for crop insurance quite a bit too, Crop insurance got cheaper for a lot of people. And we've extended the coverage levels and we're creating new products. So I think de risking of agriculture intentionally from the government on bro crops is a very profound thing.

Bruce Sherrick: 25:39

The prices sort of don't matter at some point, except that there's a quantity of production tied to that as well. And so if you knew you were going to always grow exactly an average amount, then a price creates, you know, locking in a price eliminates all uncertainty. There's still a volume effect behind that a bit. But the point that we're not at risk for this year to some degree and the next year and the next year, the degree to which we have created a safety net that's bigger and broader than just crop insurance now, Another 10,000,000,000 paid for emergency relief tied to funding from weather, but got distributed to cotton and rice and corn and soybeans and things that weren't necessarily directly affected by bad weather. Just kind of illustrates that the government's role in protecting the downside in agriculture is hard to overstate.

Steve Bruere: 26:27

Absolutely. And that's been my point. You know, I'm getting called daily by folks like, Hey, you know, we have a farm auction scheduled. Should we cancel it because of these tariffs? And, you know, the irony is I think the land market might have gone up over the last two or three weeks because there's this flight to safety right now.

Steve Bruere: 26:48

And so, you know, agriculture is a very stable place to be. And, you know, I said this to somebody yesterday. I lose sleep at night about a lot of things, but I'm not actually losing sleep about tariffs right now because I just have such a high degree confidence that the government is going to protect agriculture. And again, this Doge task force definitely introduces some complexity to that fact that the government is just going to continue to print money in perpetuity. But if there's one place where they are going to do that and where I have confidence they're going to do that, it's agriculture.

Ailie Elmore: 27:26

Well, on the production side of things, let's look, let's talk about what we actually produce, we turn out to turn that stuff into something else. What maybe I'll start to you, Bruce, first, what commodities products could be in for the most hurt when it comes to these tariffs, you know, obviously, the situation is very fluid. We don't exactly know where this is going to end up. But let's just hypothetically say that we end up with some kind of broad based level tariff on all countries. What kind of impacts or what producers might be most affected?

Bruce Sherrick: 28:00

The historic evidence would point to things like soybeans or things where we produce and export a reasonable amount of directly produced product are things that are very influenced by the cost of that. So feed items are very, very sensitive to the cost of soybeans and corn. It's difficult to export live animals, so we do also export a lot of things that support the livestock industry. Those are the obvious starting points, right? Sure.

Bruce Sherrick: 28:28

If you move upstream to the agricultural input industries and, you know, the John Deere's and the cases and so on, that's a huge concern. We'll probably end up with company sounds like, you know, given can isolate iPhones as an example of something to to

Craig Lemoine: 28:43

not tear. Sure.

Bruce Sherrick: 28:45

We'll probably create exemptions or cutouts for most of the higher value to the higher cost elements in agriculture, but I think it's really straightforward. It's it's corn and soybeans, it's apples, it's almonds, it's pistachios, it's some versions of processed and canned and easily shipped things, but it's right where you would expect it

Ailie Elmore: 29:04

to. Yeah. And Trump's whole purpose of these tariffs is trying not agriculture, but in broad basis to try to encourage more domestic manufacturing, more domestic usage of what we actually produce when it comes to agriculture. Is it currently feasible for us to actually consume everything that we produce? And what kind of areas should we look to towards growth if not?

Bruce Sherrick: 29:31

Well, I mean, in the current form of production and current form of use, of course not. I mean, we do export a certain fraction. You can't just create we can't just eat four times as much chicken. There are other industrial uses, though, of course, and it's it's not as high valued as the ones that if you let markets sort of pick what you can sell it for the most, that's that's how you clear markets out. Sure.

Bruce Sherrick: 29:54

We have a historic emphasis on RFS and renewable fuels and greening of the energy complex that has been probably deemphasized a bit in the administration. And it's not clear how much of that makes sense if it's not a subsidized industry. So it's hard to get rid of the excess. Despite the public press, there are really good programs, though, for distributing excess food around the world as well. And that still does occur and we'll get rid of it somewhere.

Bruce Sherrick: 30:23

But corn, for instance, people say if you take off the RFS, corn would really go haywire nicely. And not really, the secondary demand for ethanol is about the point where it should be and RINs are not driving the market anymore. Soybean oil has some additional uses, but not as high valued as current uses. So you get rid of it, but it's not as productive or profitable.

Ailie Elmore: 30:45

No, absolutely. And Steve, like from your point of things, what are are some of your thoughts around that? And maybe what are some areas in commodity agriculture that you're most excited about when it comes to what we actually produce and maybe some new uses for it?

Steve Bruere: 31:02

And before I answer that, I have just a little tongue in cheek question maybe for Bruce. As you've studied this over history, are people going to eat less because there's tariffs?

Bruce Sherrick: 31:15

When the price of food goes up, the distribution of what you eat is very clear, yeah. Mean, there is

Steve Bruere: 31:19

You're to eat less or you're going to eat more grain and less chicken, right? Because it takes more

Bruce Sherrick: 31:27

zoom out from The US where we're so rich and we have so much excess caloric intake that it's hard to measure. If you're looking on a world basis, the relationship between income and the quality of diet is incredibly strong and incredibly long lasting and incredibly fixed. So about a third of the world, if you gave them an extra dollar, most of it gets spent on food. For two thirds of the world, you give them an extra dollar and it doesn't get spent on food. So it's the cost of, and the cost of does get affected by where you can and can't sell things.

Bruce Sherrick: 31:55

So we've gotten in The US to the point that people can't even answer how much of your income do you spend on food because it's such a small number, we can't track it very easily. In the developing world, that's a question they can all answer, and the answer is all we can. And so, yeah, when you start to affect the relative price of food on a world basis, it really does affect what people consume and the quality of health and diets. You wouldn't see it

Steve Bruere: 32:17

in the Yeah. I Yeah. I and I I am I'm still skeptical of that. I mean, I I get it, but I also I also think there's, you know, people are generally gonna maintain their diet if they can and and that's a hard it's just like the supply chains. It's a tough thing to I tell people to quit eating meat.

Steve Bruere: 32:36

Right? But but anyhow, to to go back and this is again where I'm just so bullish on agriculture and why I'm less I have less anxiety over tariffs than maybe a lot of people because I just fundamentally believe, especially for your commodity crops like corn and soybeans, you know, people are going to continue to eat. Where, you know, almonds, for instance, you know, you might, given that that's an expensive product, you might bypass from your diet almonds. And so I think things get impacted differently depending on what they are. I think about apples as a perishable crop in the relationship with the export markets in Canada and Mexico, where you're producing so many apples in Washington state.

Steve Bruere: 33:20

And you can't just go through apples in a grain bin like you can corn and wheat and soybeans. And so those perishable crops, I think the tariffs can be rather dramatic. In and then those markets don't necessarily get the benefit of the MFP payments that the row crop producers got as well. So I I think I think an example I was sharing with Bruce the other day was on wine grapes. And on on one hand, because of the tariffs, it's gonna be expensive to import foreign wine into The United States.

Steve Bruere: 33:54

So one might think, alright, well, that's that's a positive for American wine producers because it's more expensive to bring those imports into the market. That's been part of what's been killing the wine industry in The US. But then, you know, the the barrels, the French barrels that now get imported in The United States are subject to a new tariff. And I was running some back of the envelope math. A 30% tariff on a French barrel would translate into a dollar 40 per bottle of additional costs just in tariffs on a bottle of wine.

Steve Bruere: 34:25

And and I Bruce and I were debating this. Maybe we were drinking a bottle of wine when we were debating it. But when you look at that whole thing, that's where it gets really hard for me to think through. On one hand, you're helping The US wine industry by reducing the imported wine, but you're costing more to import your barrels and your corks and your glass. And what's the net of that?

Steve Bruere: 34:50

And then what do you do to consumer demand if we go into a recession? And that's why I just think this thing is it's a real tough thing to figure out. But if you're if you're gonna pick a spot to be, I think row crop farms where back to my tongue in cheek comment, think where people are gonna continue to eat. That's

Bruce Sherrick: 35:09

where

Steve Bruere: 35:09

I would want to be right now versus apples and grapes and some of those crops where people can make alternative choices.

Bruce Sherrick: 35:16

Well, just let me pick up on what Steve said a little bit. So this complex of things that he was describing, this interconnection is exactly right. It's very complicated, and and it could be very good for domestic wine producers, and it could be very bad for, I don't know, steel producers or whatever. You can pick winners and losers, And whether or not you view that as good or bad is a political debate, and it's a it's a good debate to have. The the and, Steve, it looks like you may have reconnected.

Bruce Sherrick: 35:42

We lost you for a bit.

Steve Bruere: 35:44

Yeah. Well

Craig Lemoine: 35:45

and and and I'll I'll throw in the the uneducated ag comment

Bruce Sherrick: 35:49

for everybody.

Craig Lemoine: 35:50

I mean, wouldn't the incentive be then? If you're if you're thinking about this from the wine end, big picture. Right? So you have two kind of outcomes from the casual wine drinker here. Am I going to pay another dollar 40 for a domestic bottle of wine versus the increase on an imported bottle of wine, right?

Craig Lemoine: 36:09

Let's say it's $2 or $3 right? Think you reach a point where this is kind of a luxury good and we don't need wine to live, right? So maybe I buy a few fewer bottles, but does it really change demand? And I think it would at different price points. Right?

Craig Lemoine: 36:25

You've got like a $10 to $20 bottle of wine. You probably would see quite a bit of demand shift. You have a $400 bottle of wine. That person's going to pay $500 and they're

Bruce Sherrick: 36:32

going to pay 4.

Craig Lemoine: 36:33

That's really indifferent. So I guess from my perspective on the wine conversation, I think again, to your point, Bruce, it's just very nuanced. Right? Because different markets and different price points and they're going to impact. And then you can make sort of the more global commentary, right?

Craig Lemoine: 36:49

It's like, well, can we make barrels here at some point? Right? Like, this is your state. Make French oak barrels here. But you get the idea.

Craig Lemoine: 36:57

And I and I think, I don't know, to me, price really matters in a lot of this. Right? Because if you're really looking at top end bottles of wine, I don't think you're going to see much change. But yeah, if you're going to the grocery store and you've got this like $15 bottle and now it's 22, maybe you don't buy it.

Bruce Sherrick: 37:14

So let me try one other way of like de emotionalizing these conversations. Oh, yeah. Right? So I think you're right. And we do know what elasticity of demand means, right?

Bruce Sherrick: 37:26

So if you have the price of insulin goes up and you're diabetic, you're not going to change how much you consume. No. Right? And if you are occasional, you know, splurger of the more than an $18 bottle and the price changes, you might change your your behavior. But but we know that elasticity demand does in fact describe by definition the price responsiveness, the the change in demand for a change in price.

Bruce Sherrick: 37:49

And so when you take away capacity to buy, those all readjust. Yeah. That's absolutely true. And we can debate and guess what the demand for wine is compared to the demand for processed pork.

Craig Lemoine: 38:01

Sure.

Bruce Sherrick: 38:02

Or we can, you know, look at other things. And the way I would demotionalize it is to say, if we had never used the word tariff today instead said, what happens when you tax bad behavior? So when you put a tax on cigarettes or when you put a tax on alcohol or when you create things or what happens when you subsidize good behavior? How much do you respond? It gives you a framework to ask the same question.

Bruce Sherrick: 38:22

So if we subsidize recycling, do people recycle more? Not much. If you tax people on cigarettes, do they change their consumption? Not as much as you might have But the interesting ones are things like french fries. And if you change because of where you grow a tax on a placement or a change in the way you fry them from one type of oil to another and the prices change, you can in fact measure how much more or less people buy.

Bruce Sherrick: 38:50

Then relative to the total demand, you have to measure total income and productivity. So the big things, we don't have much debate about. The distributional things are where they all are. And here's where I'll go back to Steve's comment. He had one of the great those of you who don't know Steve as well as we do, he comes up with some of the most pithy, perfect, great, long lasting comments.

Bruce Sherrick: 39:10

And one that he first said was, Zero interest rates created a lot of business models that no longer need to exist. Something like that, right, Steve? And you may need to clarify, but he's exactly That's exactly right. And in agriculture, I also point out and we'll both be at the same conference next week. And one of the things I'll present is essentially what asset would you rather own?

Bruce Sherrick: 39:33

And in the eighties, we had an ag focused crisis and we didn't have to talk about it as though there was somebody to blame, but we couldn't observe what happened afterward. And then in 02/2008, we had a financial crisis, and there may have been people to blame, but we had an outcome, it was very bought stuff with money. And in COVID, we had a crisis, and we printed money. And each of those created really great natural experiments. If you print money, you get inflation.

Bruce Sherrick: 39:59

If you buy assets that appreciate, the government doesn't lose money. If you change the size of the Fed's balance sheet. And in this case, the tariffs, we have some precedent, but we don't have the precedent in the environment that we're in right now. But the answer is what asset would you rather own? I think it's a pretty clear and compelling argument that farmland is a pretty good asset.

Ailie Elmore: 40:20

Yeah. That's kind of where I wanted to drive this conversation in the last point, because this is the land and everything else podcast. We are land people here. So I think it's important for us to kind of backtrack. I know Steve made some comments about where he's seen land markets move in the last couple of weeks.

Ailie Elmore: 40:38

You know, especially we often compare ag or farmland with the ten year treasury. And we've seen some volatility in that. And we've, you know, it's been remained fairly strong, especially over the last few weeks volatility, but still relatively high. Maybe Steve, to your, you know, your perspective, I want you to build a little bit more on what you're seeing in agricultural land markets. And also, you know, is it in more of your commodity, your land that's devoted towards commodity agriculture?

Ailie Elmore: 41:10

Or are you seeing some volatility in permanent crops as well?

Steve Bruere: 41:14

Yeah, I mean, you know, if you just put on your investor hat, not your farmer hat and think about farmland, which for this conversation, I think it's important. You know, the reason people want to own farmland, and this is this is Bruce's data, but it's it's non correlated with public equities. It's positively correlated with inflation. And so when you watch the stock market get hammered the last couple weeks, you know, our phones started ringing and and it's what I call the smart money that folks that are sick of watching their stock market account go down 10% in a single week. And that's when farmland really shines.

Steve Bruere: 41:49

That's when people appreciate the stability of the asset class and and they want that diversification in their portfolio because you're not gonna wake up one morning and find out your farm's worth 10 to 15% less. So so I think the the smart money, as I call it, looks at farmland as a stable place to put their money and and and markets like this remind people why it's such a great asset. And then I think there's a lot of folks looking at the tariff side as well, and it's clearly inflationary. And so if you believe that we're going to have some inflation, you know, farmland and inflation are positively correlated and there's a long history of that. And these are the types of environments where you want to have that inflation protection.

Steve Bruere: 42:33

But on the contrary, you know, gold gold hit a record high last week and, you know, the ten year treasury was staying pretty stable, moving around a little bit. And you're like, all right, is, are we heading into a recession? Is the ten year treasury going down or are we heading into this inflationary market where, you know, gold represents where the the financial markets are headed? And and, you know, I can make the case that bring on inflation. I want to own more farmland, right?

Steve Bruere: 43:02

Like more inflation, the better farmland is going to do. But I can also make the case that, you know, the ten year Treasury rate going down a recession is going to be positive for people in farmland as well. And so to to Bruce's point, like no matter what corner I peak around right now, there's not there's not too many reasons why I wouldn't want to own farmland right now. The stability, the inflation protection, the non correlation, just the non financial benefits that I think people are discovering around farmland right now, around ecosystem services and renewable energy. And, you know, if we are going to produce more in this country and we're going have more manufacturing and we're going to become more dependent on our own resources, I think you want to own farmland.

Steve Bruere: 43:49

And so I just can't think of a reason why you wouldn't want to be bullish on farmland right now. And that's what we're seeing. We're seeing that we had a farm auction in Iowa last week that, you know, very high quality ground, but a couple of pieces brought 22,900 an acre. And we had a sale in Illinois that we thought would bring 14 or 15, and it brought 23,000 an acre. And so there's a lot of money lining up.

Steve Bruere: 44:15

Again, this is some of Bruce's data, but you've got this $4,300,000,000,000 asset class that's only got 13% leverage against it. And so the impacts of interest rates aren't as profound on farmland as it is in other markets. Yet, you know, with inflation, I think this is where you want to be. So little bit of a commercial for farmland.

Bruce Sherrick: 44:36

Well, to the you know, that was the halftime of the Super Bowl. I'll give the quick commercial after the end of the Super Bowl. The difference between an institutional buyer and a neighbor has to be a little bit more profoundly understood now too. And so the leveraged buyer whose historic model might have been buy up a bunch of under leveraged farmland, as you said, 12% or less or 13 certain peaks, and then put it together and put rational capital stack underneath it, works really well when it works really well. And right now we're in a place where we don't really know what rates are gonna be.

Bruce Sherrick: 45:09

The cap rates are below perhaps the cost of financing, and you don't have that same group of people able to create this permanent buy box style of demand. But what you have is what you just said, the neighbors and the intergenerational wealth protection and the others who want a piece of farmland because has all those things that their four zero one ks does not. So I think that's leading to some changes in the way farmland transacts and the people you see at the auctions and at the table and how to bundle it up and create longer term kind of positions where you have access to the asset class, but don't necessarily have that same historic model of, you know, only three people with the particular histories wherever at an auction.

Steve Bruere: 45:55

Bruce, what's the you've got the data on this, when you look at inflation and farmland returns, what's the spread on farmland versus inflation?

Bruce Sherrick: 46:04

Again, everything caveated a little bit, if we just talk about row crop and take an average, you get more than 2% over a long period of time. I always try to condition this and I have a chart that you've seen a hundred times. It goes all the way back to the 70s. When interest rates were 14, the spread was much bigger. When interest rates were three, the spread is much lower.

Bruce Sherrick: 46:24

But as you think of the level of inflation, sort of the multiplier on that that you would expect as a total return to farmland is pretty constant. So as we scale up to higher if we scale up to higher inflation rates, I expect the spread to actually get bigger. If you scale down to long term 1% inflation, it might only be a percent and a half gain over that. The thing you're pointing out, though, is also really critical. The sort of volatility around that doesn't change as much as it does in financial markets.

Bruce Sherrick: 46:51

So the maximum drawdown in agriculture, percent, percent and a half. Maximum drawdown in the NYSE or the NASDAQ or the S and P, depending on which date you use around .com in particular, might have been 50%. So again, I think all the things you're saying are leading to why you evaluate it as an asset you'd want to own. But the folks who want to own it are still sensitive on one end of that demand spectrum to the cost of interest and on the other end don't tend to be. Absolutely.

Bruce Sherrick: 47:21

So

Steve Bruere: 47:21

Bruce, shoot holes in this for me, if you would. And sorry to hijack this, Ailey. But, know, so a lot of folks look at farmland and say, well, the cap rates are too low, right? Yeah. And so your, you know, your Midwest Iowa, Illinois cap rates might be 2.5 to three right now, or maybe two to 2.5, I should say.

Steve Bruere: 47:41

But your your twenty year appreciation rate is, you know, six to 7%, you know, Iowa, Illinois. And so that total return gets into that 8.5, nine percent total return. And going back to Bruce's comment on leverage, when you could borrow money at three or four, you you look back, it was so obvious we all should have just been borrowing as much money as we possibly could have borrowed and bought as much farmland as we could have bought looking back. And I think a lot of people now are looking at that total return spectrum and saying, all right, if I'm going pay six and a half for my debt, then I'm only getting a two and a half cash yield, then I've got to have, you know, 6% appreciation in order to keep up with just the fact that that's where I'm putting my equity. And I do think that's creating some head scratching moments for people that are using leverage right now.

Steve Bruere: 48:32

And that's the dynamic that Bruce is talking about. Whereas when corn was $6 and interest rates were 3%, it was it was a good idea for everybody to buy farmland 100 of the time, all the time. And now you've got to really make that decision like, hey, do I want to tie up my equity in this asset knowing that I may only get a spread of 200 basis points once I put the leverage on it. That's what's driving a lot of these decisions for a lot of neighbors and farmers right now.

Ailie Elmore: 49:01

Yeah. That's a really, really good point.

Bruce Sherrick: 49:03

I was gonna say no holes to shoot in that at all. I think the the duration that you hold farmland is also important. And, you know, again, we wish we would record our calls back and forth on the drive home sometimes because the next day is like, Hey, was a good point. What'd you say again? But the average amount of farmland that turns over at arm's length is really still around 2% or less in the middle of the country.

Bruce Sherrick: 49:26

And that's not much. That implies a really long hold period. And that also is how you get around the problem that transaction costs are still really high. Hard to buy and sell a farm. So all of those things are also features that make it different than equities.

Bruce Sherrick: 49:39

We can all buy and sell a hundred shares of GM before this call ends and pay almost zero on the round trip. You can't buy and sell a farm between now and 05:00 and, you know, have that same kind of rebalancing effect.

Craig Lemoine: 49:52

Well, and I think it it kind of hits on the thesis of of this whole podcast is the idea that when we look at land and we look at alternative investments, we're looking for different characteristics than easier to come by stocks, bonds and equity markets. And, you know, in the conversation that Steve just proposed about, you know, debt cost and return, I think that's where you have some pretty wildly different views on this perspective. If you're looking at someone that maybe inherits it, but doesn't farm and what they're looking at as a return and they're kind of baffled, right? As opposed to somebody who lives this like Ailey, like you do. And I think that you're looking at it like, can I get more please?

Ailie Elmore: 50:36

Right?

Craig Lemoine: 50:36

And so I think you're starting to see with volatility, some varying perspectives. And I think with interest rates higher, more varying perspectives. We didn't have quite as many varying perspectives when you could borrow at two or three or 4%. Right? I think that was a little more locked in.

Craig Lemoine: 50:52

But now that you're seeing higher borrowing costs from a retail standpoint, if this isn't your livelihood and you don't understand the asset, you may have a harder time evaluating it in a short term framework. And I think Bruce, to your point, having that longer term duration tied to this makes a lot more sense for everybody.

Ailie Elmore: 51:08

Yes.

Bruce Sherrick: 51:08

There's a phrase to an agriculture that may sound a little majority, but buy and die strategy. It's a great asset to transfer intergenerationally. Oh, absolutely. Basis and other things and other, you know, 2,032 evaluations if needed. But it's a great long term asset because you don't have to get the gain

Craig Lemoine: 51:26

Right.

Bruce Sherrick: 51:26

Or you don't have to get the return in income. A lot of it is in capital gain. And so if you're in a position where you don't need the annual income to consume, two thirds of the return to farmland might come in the form of appreciation. That's a very tax efficient place to put money.

Craig Lemoine: 51:41

And I think to kind of round up as we're running a little bit long on time, I'd love Ailey if you kind of started your perspective summaries, some things you want our listeners to get out of this and we'll go around to that end.

Ailie Elmore: 51:53

Yeah. Well, I have a personal funny kind of anecdote.

Bruce Sherrick: 51:56

We'd love to hear

Ailie Elmore: 51:57

kind of on some comments that Steve was making about gold. So I'm getting married this summer, and my fiance and I picked out our wedding bands a couple of weeks ago and they're gold. And the jeweler was like, man, I wish you would have come to us a couple of months ago because the price of gold is a lot higher than what it was. And so maybe my fiance and I need to just take that money and buy farmland instead. But I think from my perspective, both on the academic side and then also on, you know, as someone who is actively involved in my family farming operation, I take a little bit more of a conservative approach in the short run when it comes to the operation side of as being a farmer and thinking about, you know, it's going to become really crucial to really look at the bottom line and the kinds of decisions that are being made at the farm level surrounding inputs and really making sure that you're having those conversations with your input providers, with your lenders about your situation as a farmer.

Ailie Elmore: 53:05

And then also thinking in what kind of strategies you can do to diversify your operation, whether that is looking at different forms of production, different modes, things like that. And so I think you're going to see a lot of farmers kind of evaluating that in the next couple of years, even though I am always bullish on agriculture. I think you're going to continue to see people to reevaluate their types of production, their growing methods. And there's lots of uncertainty in the current legislative landscape and the current administration around the future of conservation programs and the future of ad hoc payments and things like that. And so really honing in on that competitive advantage as an agriculture producer that you have.

Ailie Elmore: 53:52

And then on the institution side, always bullish on farmland in the long run. I would wish that my parents had bought more of it when I was a But that's always that conversation to have. But I've really enjoyed just getting to sit down with the two of you. Do you, you know, Steve, Bruce, do you have any kind of final last words that you would like our listeners and viewers to kind of think about and ponder about?

Bruce Sherrick: 54:20

Who do you want to go first? We both always have extra thoughts.

Ailie Elmore: 54:24

Well, maybe, you know, I started this podcast with you, Bruce. So let's maybe end it with Steve. So you go ahead and start us off.

Bruce Sherrick: 54:29

I have nothing profound at. I think the the prediction that farmland would become a investable asset class is something that I've been making for at least twenty years, and I've been, you know, a couple years away from that being true for the last ten or whatever. But it's getting to the point where it is something that you can consider individually or at an institutional level or in a fund or in a qualified situation. So land and everything else and the interest in alts is really incredibly timely right now. And it's not just agriculture, it's all real estate.

Bruce Sherrick: 55:00

But after COVID, we just pummeled commercial, of course. And we've discovered that residential is a very unique asset class on its own and that there are supply issues. And Unaffordable housing means you wanted to be able to buy a bigger house. It might be a complicated thing, but farmland is absolutely fundamental. And the thesis behind it is pretty simple.

Bruce Sherrick: 55:19

You grow something, you sell something, and if it's worth more, the asset value goes up. And in the long term, I think we haven't broken the thesis that the world's population will continue to grow. That requires more food. There are only certain parts of the world you can grow food in. But most importantly, as quality of diets go up and this is again, Steve and I had this, we just had that earlier conversation, as quality of diets go up, you have to feed nine calories to say an animal to get one calorie back for human consumption.

Bruce Sherrick: 55:48

So the grand explosion in demand is not just from population growth, It's also from quality of diets around the world. We've seen that and we'll continue to see that for another twenty, thirty, forty years. So as long as we can continue to satisfy where the demand comes from, then US Agriculture and South American agriculture and parts in The Middle East, areas around the world that will continue to be really, really critically important, but they'll never be unimportant. And I think that's kind of the reason that I just like Steve, I don't know what asset I'd rather own. And unlike you, I don't wish that my parents bought more land.

Bruce Sherrick: 56:21

Wish my great, great, great, great grandparents had bought a lot more land.

Ailie Elmore: 56:25

Yeah, I would agree with that. Steve?

Steve Bruere: 56:28

Yeah, I think, you know, I've said there's two types of people in this world. There's people who own farmland and there's people who wish they did. And, you know, Craig, you do a great job with talking about diversification and whatnot. And I think people who own farmland probably that are farmers might own maybe a little too much farmland and maybe should have a little diversification into some other things. And people who don't own any farmland at all likewise might maybe need to own a little farmland.

Steve Bruere: 56:56

And I think these are the types of environments where that diversification is important. And I'm bullish. I'm incredibly bullish on farmland. You know, I use this example before Louisiana Purchase translated Iowa land value into 3.6¢ per acre. And everybody who's bought a farm since then thought they overpaid.

Steve Bruere: 57:17

Right. And here we are, you know, statewide average at 12,000 an acre. And people ask, how is this going to keep going up in value? And what are the impacts on COVID and tariffs and interest rates and the war in Ukraine and all these different things in the election? And farmland is going to be worth more ten years from now than it is today.

Steve Bruere: 57:38

And it's just a great asset if you believe that the world's going to have some inflation in it. And I believe that it is. And so I'm pretty bullish on it. So I look at the environment right now. If there is any distress out there, if you show up at a farm auction and there's some negativity or, you know, somebody is not as ambitious at bidding right now, It's a great opportunity to get in and participate in the market and take advantage of the fact that there is some anxiety out there.

Ailie Elmore: 58:04

Awesome. Well, great final thoughts for us today. We appreciate both of you guys joining us.

Craig Lemoine: 58:08

Thank you, everybody. And it's been an awful lot of fun and I look forward to next time. Yep.

Steve Bruere: 58:14

Thanks for all you do guys.