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Agriculture Investing - February 2014



    With the world’s community growing at a rate of more than 70m new mouths to feed per year, it is generating huge long-term growth across the global agriculture industry.

    Ben Yearsley, head of investment research at Charles Stanley Direct, says: “With agricultural commodities, investors only have to look at the global population – it is not getting any smaller, it is growing, that is a long-term trend. There are many ways to invest and there is money to be made.”

    Today total global general consumption, including food, is estimated at $38trn (£23.1trn) but is forecast to almost double to $64trn by 2025, chiefly as a result of demand from emerging markets, which make up roughly 85 per cent of the world’s population.

    As incomes rise, on the back of growing economies across developing nations, more and more people are changing their diets. Most notably there is a tendency to eat more meat such as beef, which means greater demand and need for not just cattle but animal feed such as corn and wheat.

    First State Global Agribusiness fund manager Renzo Casarotto says: “The need to provide safe and high quality food has seen Chinese companies increasingly look abroad for investment and lower commodity prices are encouraging higher imports.

    “The growing middle class in the developing world is leading to additional demand for food and fibre. The companies in our investment universe are striving to expand their production to meet this growing demand.”

    But while the long-term macro environment appears solid, short-term trends will ensure agricultural or soft commodities remain a divergent asset class.

    A quick glance at how the sector played out in 2013 typically highlights the differing fortunes between crops. Both Brazil and the US for example yielded large crops in 2013 driven by record acreage and decent growing conditions, ultimately pushing soft commodity prices lower. Corn for example was the worst performing soft commodity in 2013, falling 40 per cent after record growing led to an oversupply according to ETF Securities.

    For its part wheat also fell 22 per cent in 2013, from a high base set in 2012 during the US drought, while increased supply from non-US sources also contributed to the price weakness.

    In contrast, cocoa emerged as the top performing soft commodity in 2013, rising 21 per cent, as hot and dry weather conditions in West Africa, the primary growing region, hampered the crop.

    As a result the International Cocoa Organization estimate there was a 160,000 tonne supply deficit in 2012/13, which was driven by a 2.4 per cent growth in consumption and a 3.7 per cent contraction in bean production.

    But while agricultural commodity price performance is expected to be diverse, corn and coffee are set to be among the better bets in 2014.

    After collapsing to a seven-year low in November 2013, some 60 per cent below its peak in May 2011, the price of Arabica coffee is likely to rise this year says ETF Securities research analyst Nitesh Shah

    Mr Shah says: “Responding to weak price conditions, farmers in Brazil have devoted less land to coffee growing and have accelerated coffee bush pruning. Pruning assists the longer-term health of the coffee bush, but compresses near-term yields.

    “Production in Brazil, which produces 45 per cent of global Arabica supplies could fall 5 per cent this year. Leaf rust fungus, which reduces the yield of coffee bushes is still affecting many central American growing regions and likely to constrain supply.”

    In addition, with stock surpluses now largely priced-in and demand from animal feed remaining strong, experts in the sector believe there is upside potential for corn and wheat prices.

    While speculative positions in the futures market remain net short, there is potential for a short-covering rally if there are any negative shocks to supply adds Mr Shah. But Mr Casarotto points out that when it comes to investing, it is not all about the cost. “There is a widespread belief that soft commodity price movements are necessary for positive returns from agricultural equities.

    “We believe that a number of other primary factors combine to deliver earnings growth in agricultural companies: production volumes, scale of operations, productivity or cost performance and the type of agricultural business. Commodity prices alone are not the main performance driver.”

    Philip Scott is a freelance journalist

    In this special report


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    2. Biofuel production in Argentina is forecast to increase to what percentage between 2013 and 2022?

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    4. Population growth is a key driver for agriculture demand, what is the forecast rate of annual growth to 2050?

    5. By 2050 the International Energy Agency wants biofuels to account for what percentage of global transportation fuels?

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