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Investing in Agriculture - October 2015

    Investing in Agriculture - October 2015


    There are several ways for investors to gain exposure to agriculture as an asset class, whether it’s through a fund that invests in the equities of farming companies or via a fund that focuses more on agricultural trends.

    James Govan, investment manager of the Baring Global Agriculture fund, notes: “The main ways for UK retail investors to gain access to agriculture is through equity funds, ETFs [exchange-traded funds] or commodities.”

    He suggests an agriculture equity fund can provide useful geographic and sector diversification and points out that over the long term, agricultural equities have significantly outperformed commodities.

    According to FE Analytics, the MSCI World Agriculture and Food Chain index gained 5.9 per cent over the 12 months to September 24. By comparison, the MSCI World index climbed just 0.4 per cent.

    In terms of the sector’s leading companies, two noted pieces of potential merger and acquisition activity have come to nothing, though, with seed producer Monsanto’s approximately $46bn (£30bn) bid for Syngenta having been withdrawn for now. Meanwhile, fertiliser group Potash Corp’s takeover offer for German fertiliser producer K+S has been rejected.

    Headwinds also threaten to destabilise the sector, including the continuing decline in commodity prices and a weather event called El Niño, which has been known to impact crop yields severely.

    Gertjan van der Geer, senior investment manager of the Pictet Agriculture fund, explains: “It [El Niño] is the warming of the lower part of the Pacific Ocean. The warm stream actually reduces the nutrient content in the ocean and impacts the precipitation in the whole southern hemisphere.

    “So, what happens in an El Niño year is typically that the southeast Asian region, as well as Australia and New Zealand, are much drier than usual and at the same time, the western side of South America is much wetter than normal.”

    The Australian Bureau of Meteorology has forecast El Niño will strengthen this year and continue into 2016.

    But Mr van der Geer points to the drive towards efficiency “not only at the production stage but throughout the entire distribution chain” as a tailwind.

    “It basically started with automated steering systems,” he says. “So a GPS-controlled tractor which drives itself, to every possible add-in you can think of to allow the farmer to better control what needs to be applied on the field in terms of fertiliser, crop protection chemicals – are raising the accuracy of farming to a level we haven’t seen before.”

    Cyclical industry

    But Mr Govan acknowledges that agriculture investing is not for everyone. He remarks: “This is a contrarian investment, as sentiment in the sector remains very low and although this year we have had a good harvest, this can all change next year, subject to weather.

    “Indeed, the weather over the last two years has been favourable in most regions of the globe for crop production, which is unusual.”

    So, when is the best time to invest in this sector?

    Mr van der Geer says: “You have to remember that agriculture is a cyclical industry and the best point in time to invest is after a period of underperformance, because that means you’re at the lower end of that cycle. Given that soft commodity prices have been reasonably weak for a relatively long time, that moment could be right now.”

    Ellie Duncan is deputy features editor at Investment Adviser


    51m tonnes

    Additional global meat consumption by 2024, with annual average growth of 1.4  per cent expected


    Proportion of total protein intake that will be obtained from cereals in the world’s least developed regions by 2024

    320m tonnes

    Amount of additional cereals to be produced globally by 2024, of which 180m tonnes will be coarse grains

    2,800 kcals

    Amount of calories expected to be consumed per person per day by 2024 in developing economies, just below the projected intake for developed regions

    Source: OECD-FAO Agricultural Outlook 2015-2024

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. Brazil produces approximately what percentage of the world’s Arabica coffee?

    2. The current El Niño weather phenonmenon is expected to last until when?

    3. How many of the Investment Association listed funds with agriculture or agribusiness in the title have delivered a positive return for the five years to September 24 2015?

    4. The MSCI World Agriculture and Food Chain index gained how much in the 12 months to September 24 2015?

    5. China holds 120m tonnes of maize in reserves, which is what percentage of annual domestic consumption?

    6. When was the last El Niño cycle before the current one?

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