Why do food and agriculture investors have a limited appetite?

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Why do food and agriculture investors have a limited appetite?

Last autumn, the crops in the northern hemisphere were gathered in for another bumper grain harvest.

From a food security perspective this is good news, but the millions of tonnes of grain being added to the already record high stockpiles every year often leaves commodity prices somewhat depressed, meaning many farmers’ incomes in the US and Europe must deal with headwinds.

A recovery in grain prices is once again delayed.

A narrow focus on grain farming - particularly North-American grain related companies - dominates many investment funds that claim to consider the whole food spectrum and label themselves as ‘global food and agriculture funds’.

Perhaps this is partly explained by the scale of many of the US grain-related companies: at over $10bn each, the market capitalisation of companies like John Deere, Monsanto, Agrium, Potash Corp of Saskatchewan, Archer-Daniels-Midland or Bunge, are among the largest in the global food and agriculture company universe.

The global food economy is set to grow steadily in the long-term as a result of drivers such as rising populations, increased incomes, and urbanisation.

But this narrow focus also reflects an appetite for the opportunity to make quick returns.

When there is a bad harvest, grain prices can rise sharply, and with them the price of farm inputs such as fertiliser or equipment to help boost production for the next year.

In 2007 and again in 2010, when grain prices spiked-up, the share prices of these companies jumped by 50 per cent or more - in most cases only to then fall back again.

What about sustainability?

The supply and demand in North American grains is different to many other global food markets – while some wheat goes to traditional uses, most grains go to feed animals (such as beef feed-lots) or is turned into biofuels.

Indeed, federal policy specifying the inclusion of ethanol from biofuel (mostly made by distilling corn) in gasoline has encouraged millions of acres of corn to be planted. 

However, the cost of reducing one metric ton of CO2-equivalent through the production and use of corn-based ethanol is extremely high, both in federal and state subsidies, and environmental impact.

In the coming world of the electric car, any withdrawal of subsidies to ‘grow gasoline’ would significantly cut demand for North American grain.

Focus on grain comes at a price

Putting all your eggs in one basket has risks. Such concentration on North American agriculture misses so many other opportunities in the world of food.