Freak weather clouds opinions

This article is part of
Investing in agriculture – July 2013

Prolonged winters, excessive flooding and serious droughts are having a considerable impact on crop prices as farmers come under pressure to meet increasing demand.

According to the recent Neuberger Berman white paper, the world is struggling to provide a consistent supply of food for a growing population, as a result of wage increases in the emerging markets and the shrinking supply of new fertile land.

The paper states: “The US and Europe currently account for approximately 15 per cent of the world’s population, but approximately 40 per cent of global grain demand.”

Article continues after advert

But both the US and Europe have been hit by freak weather in the past 12 months. The US, for example, experienced a late summer that resulted in a bad corn harvest. Meanwhile, Europe has been the victim of serious flooding that is likely to place significant pressure on farmers.

Fred Baccanello, analyst at Dominion Funds, says the freak weather also leads to increased volatility in the underlying commodity, particularly with corn and soya beans.

In spite of it being a record planting year for farmers in 2012, the US experienced its worst drought since 1988. This resulted in US corn production dropping to 13bn bushels, which was only marginally higher than the previous crop of 12.4bn bushels, according to data from the US Department of Agriculture.

This has led to depleted grain inventories or “stocks”, which, according to Neuberger Berman’s research, are at a 50-year low.

“Sugar and soy stocks are also low relative to historic levels,” explains the white paper.

Another contributing factor to the problems within the agriculture sector is the amount of arable land available to farmers to aid increased production.

The World Bank estimates that demand for food will rise by 50 per cent by 2030.

With this in mind, Mr Baccanello explains: “We must find ways to increase farm productivity if we are to feed the growing population.”

However Aris Vatis, portfolio manager of US equities at Fidelity, suggests that while much of the arable land in the developing world is inefficient, there is an interesting case for the use of fertiliser.

“Significant gains in yields can be achieved via the use of fertilisers. The demand for, and the price of, fertiliser therefore looks likely to grow strongly in the next decade,” he explains.

Jason Lejonvarn, a commodities strategist at Hermes Fund Management, adds that farmers in the US have been increasing their spending on technologies to increase production. He claims the market has overreacted and based its valuations on the freak weather of 2012.

“Last year we had such a harsh summer that this year people are overreacting to the perception that the summer is going to be equally harsh. If anything, the market has overcompensated.”

Jenny Lowe is features editor at Investment Adviser