This article first appeared in ABI Journal.

M&A activity in the U.S. has been strong for the last several years, especially in the middle market, and transaction multiples remain at record highs. Unfortunately, these multiples vary widely by sector, especially in agriculture. It has seen neither the volume nor the multiples that are evident in the rest of the market. Here is a look at several of the components (good and bad) that are affecting this market.

The US economy: a historic run

Since the Great Recession, the economy has been steady and improving. Home prices have recovered, and unemployment is under control and has declined to almost full employment. Interest rates have been at extremely low levels for an extended period, and gas prices have been relatively affordable. Major stock market indices, including the S&P and Dow Jones, have more than tripled since the Great Recession. Exhibit 1 shows the huge U.S. historic domestic product growth rate. The gray bars indicate a recession, which is typically recognized as two quarters of negative gross domestic product (GDP) growth. (Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research.) We are well above the mean time between recessions for over the last 75 years. According to this survey of professional forecasters, the real GDP growth rate in the U.S. is likely to remain flat.

The current economic environment

When looking at valuations for any company, it is important to understand the current economic environment. If you look at where the U.S. economy is today, there are several factors that have differing effects upon valuations in the agriculture sector: GDP at 2.1 percent with an outlook of 2.1 percent (neutral); the unemployment rate at 3.3 percent and an outlook of 3.6 percent (negative); and the Fed Funds rate at 1.75 percent and an outlook of 1.75 percent (positive).