EquitiesJan 31 2014

How to invest in agriculture

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Agriculture is fast becoming a more mainstream investment story, driven by demand from a growing population, the use of food stuff as alternative fuels and by changing demographics in emerging markets.

But while the asset class has moved onto the radar for investors, access to it remains somewhat limited, with just 14 open-ended vehicles recognised by the FCA. Of these just five are listed in the IMA universe.

Desmond Cheung, manager of the BlackRock World Agriculture fund, notes that more than 95 per cent of the team’s work is focused on investing in agriculture equities.

But he adds: “When people invest in agriculture there are different reasons behind it: if they’re bullish on commodity prices the most natural instrument would be investing directly into commodity futures. I don’t know if this is the best way to go about it.

“If you use the index approach, what you are most likely to get is a basket of different commodities, and there is a certain degree of different dynamics in a basket of commodities.

“Sometimes corn, wheat and soy will trade on very similar parallels in terms of fundamentals, but if you look at the commodities basket when you buy into the index, inevitably you’re buying into other things as well, such as sugar and cattle. You’re not really expressing a very specific view.

“If you’re bullish on a particular commodity then direct investment in an active manner in commodities futures could be a better way to express that view.”

In terms of the open-ended funds, most focus on gaining exposure to the agriculture theme either through the ‘downstream’ or ‘upstream’ parts of the sector.

Mr Cheung explains: “We need to invest in the supply growth either upstream in the grain, oil, seed sector, or talking about livestock production becoming more efficient. The downstream side is investing on global agriculture related infrastructure such as grain storage facilities etc.”

He adds that the benefit of investing in agriculture through equities means investors are sheltered to a certain extent from the near-term price volatility within commodities. While corn prices might fall and people are bearish on agriculture, the fund is more flexible and can invest in technology or the livestock sector which benefits from lower feed prices.

James Govan, manager of the Baring Global Agriculture fund, admits that 2013 was a difficult year for agriculture commodities with corn, wheat and soybean all falling during the year.

“Clearly our focus is on the equities, and the benchmark, the DAXglobal Agribusiness index was up roughly 4 per cent last year, which was significantly below a lot of the global equity indices.

“The reason why the asset class didn’t do particularly well, using the index as a reference, had a lot to do with the fertilisers having a poor year. Also with the grain price coming back that is generally unhelpful because it means farmer profitability is reduced.”

However, there were some bright spots, with Mr Govan highlighting positive returns in the region of 20 per cent from the meat, fish and dairy sector and the processing and distribution sector.

“There are some interesting sectors where we’re investing. I would say on many of the upstream companies things are beginning to improve and generally speaking agriculture equities look quite reasonable. They’re certainly not expensive.”

Alternatives to funds

However, exposure to agriculture does not always have to be in a dedicated fund. Jake Robbins, manager of the Premier Global Alpha Growth fund, says there are a few ways to try and play it by investing in particular stocks.

“We own a company called CF Industries, which is a US manufacturer of nitrogen-based fertiliser and a lot of these stocks always trade very cheaply in our view. Part of the reason is their earnings tend to be very volatile as they are linked to the price of corn.

“We like that kind of way of playing it because the market is undervaluing these kinds of assets.”

An alternative option is through the ‘genetically modified’ route and crop science companies such as Monsanto that are developing new and improved seeds such as ones that are more drought resistant or can produce more yield from a set acreage of land.

“Everyone knows that story though, and Monsanto looks quite expensive,” warns Mr Robbins. “But we do think there an attractive story there.”

Aside from traditional equity funds, another way to gain access to agriculture is through exchange traded products (ETPs) such as exchange traded commodities (ETCs).

Neil Jamieson, head of UK & Ireland at ETF Securities, notes that in 2013 agriculture ETPs saw outflows in aggregate of $42m (£26m).

But he adds: “This masks two divergent trends: outflows from broad basket exposures of $232m, and inflows into individual exposures with coffee seeing the strongest pick up in interest, with inflows of $203m.”

Mr Jamieson says this highlights the potential uses of agriculture ETPs.

“On the one hand, broad exposure can provide good portfolio diversification, i.e. agriculture can be expected to have a low beta to equity markets, while commodity specific exposure, e.g. coffee, corn, wheat, enables investors to take advantage of opportunities that relate to the individual commodities.

“Opportunities may arise from a variety of factors, including the disruption of supplies due to extreme weather and political risk.”

However, these events such as the drought in the US and elsewhere, or flooding in the UK, can also have a downside.

Ben Willis, investment manager and head of research at Whitechurch Securities, says: “We remain wary of investing in soft commodities as this is a highly unpredictable investment strategy, relying on the luck of the gods in some instances, such as weather patterns and harvest fortunes. Also, as softs are traded on the futures market, speculative risk needs to be considered.

“We would rather play the agricultural theme through investing in agricultural businesses rather than speculating on soft commodity prices. This approach offers diverse access to a range of spin-off themes, which Sarasin have coined ‘from field to fork’.

“ETPs are a low cost option of actually tracking the future prices of a basket of commodities. But as mentioned, we find this too speculative as fortunes can be subject to poor weather patterns and/or natural disasters.”