Advertorial: Three years sorting the wheat from the chaff

Soft commodities include coarse grains like corn, wheat and barley, as well as soybeans; specialty products like sugar, cocoa, coffee and palm oil; proteins such as beef, pork, chicken and fish; and forestry. The long-term demand drivers supporting these industries are there for all to see and warrant a closer look from an investment perspective.

A larger population is a hungrier population

It is well known that the global population is growing at an unprecedented pace. Exact estimates vary, but according to the UN the global population will rise to more than 8 billion by 2025 from around 7 billion today. The pace of urbanisation is also picking up. As people migrate to cities seeking work and a higher standard of living, increasingly they are buying their food rather than growing it. The global agribusiness sector is having to evolve rapidly in order to keep pace with these enormous demographic shifts.

It isn’t only how much we eat, it’s what we eat

Not only are record volumes of food being consumed, rising income levels in emerging regions mean that more grain-intensive food is being consumed. This trend has remarkable implications for many parts of the agricultural supply chain; it takes seven kilos of grain to produce a single kilo of beef! In the past 10 years the world’s grain inventories have been depleted.

Agribusiness isn’t just about food

There is a lot more to the agricultural sector than growing crops and rearing livestock, and the outlook for other sub-sectors is equally compelling. Prospects for the forestry sector, for example, look particularly bright due to a combination of buoyant demand (improving living standards means increased demand for tissues, sanitary products and construction activity) and subdued supply.

China’s economic growth has created a strong export market for North American lumber producers. Over the past six years, Chinese lumber imports from Canada have increased 15-fold but still represent less than a third of the country’s import requirements.At the same time, an improvement in the US home building cycle has seen demand increase.

These developments are occurring at a time where the supply of logs and lumber, particularly from Canada, is declining.

That’s great for farmers and forestry owners, but what about for everyone else?

The obvious question for investors is how to access the growth opportunities that clearly exist in various parts of the agribusiness sector.The most liquid way is via an investment in the shares of listed companies that are engaged in theproduction, processing, transportation, trading and marketing of soft commodities, as well as those which supply products and services to the agricultural industry.

Global investment managers have seen the opportunities in the agribusiness sector and launched funds that can be accessed by everyday investors. These vehicles provide effective exposure to the agribusiness sector by diversifying investment by geography, commodity type and sector (i.e. fertiliser companies, agricultural equipment manufacturers, as well as food growers and processors, for example). Thisdiversification helps to mitigate arguably the greatest risk of investing in agriculture, i.e. the weather.

The First State Global Agribusiness Fund has recently celebrated its three year anniversary and is one of the more established products in the market. Those who invested in the Fund when it launched have seen their investment grow by 32.5% over the three years to the end of May 2013 [Source: Lipper], which underlines the attractive investment opportunities that exist.

Investing in agribusiness requires a specialist skillset

Given the specialist nature of this niche area of the market, First State believes it is imperative that investors have a skillset and background which is uniquely linked to the agribusiness sector. The managers of the First Stage Global Agribusiness Fund combine financial skills with backgrounds in agriculture, engineering and chemistry. This is a unique combination of expertise that few competitors can match.

First State believes there is no substitute for visiting companies’ operations first-hand in order to assess the economics of each asset and to better understand the everyday challenges that are faced. The research effort therefore continues to be based on a high level of contact with agribusiness companies globally. In the three years since the First State Global Agribusiness Fund was launched, the investment team has completed more than 150 agricultural site visits to over 20 countries in order to help identify the best long-term investment opportunities.

The focus is on the upstream and mid-stream portion of the agricultural value chain, as these companies are beneficiaries of the expanding volume requirements in the agricultural industry. The portfolio typically includes companies that are enhancing the productive process or expanding their productive capacity. The emphasis is on companies which have strong production growth profiles, better than average margins, conservative balance sheets and management teams that are capable of delivering strong shareholder returns through time.

For more information on the First State Global Agribusiness Fund visit www.firststateinvestments.com