Advertorial: Three years sorting the wheat from the chaff

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Investing in agriculture – July 2013

Rather less well known are the opportunities accessible in the soft commodity sector, a term which is used to describe commodities that are grown rather than mined.

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

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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.