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Investing In Agriculture – July 2013
Published by Investment Adviser | Jul 01, 2013 The term agriculture usually brings to mind crop prices and the effects of drought or flooding on harvests, but the sector is more diverse than many realise, and weather is not the main driver of investment trends. Instead, the biggest effect on agriculture investing is the improving living standards and changing food habits of the populations of emerging and developing countries. Jake Robbins, manager of the Premier Global Alpha Growth fund, says: “As people become wealthier they are shifting their diet from basic crops, such as rice and potatoes, and eating a lot of meat. So as the demand for meat rises the demand for crops rises almost exponentially. “That is the biggest driver. We saw in 2007-08 that when supply cannot meet demand, you get huge spikes in the price of crops and meat.” Skye Macpherson, portfolio manager, global resources at First State Investments, agrees that this trend is leading to increased demand for many agricultural commodities such as dairy, sugar and meat. She adds: “Interestingly, higher meat consumption is having a multiplier impact on grain demand as animals are quite inefficient converters of grain. Impacting the listed agricultural equities is ongoing M&A in the sector, as unique and high-quality assets are being consolidated. “Most recently we saw activity in the Australian grain-handling industry with ADM bidding for GrainCorp, and in the US pork production sector, Shuanghui International bidding for Smithfield Foods. The sector is also growing, with numerous IPOs and capital raisings taking place in the past 12 months.” Mr Robbins adds that M&A activity has also been seen in Brazil and Norway, highlighting the fact that industry players value these businesses higher than the market does. This is because both the input cost for the grain to feed the chickens and the price you sell the end product for can fluctuate widely. “So it is difficult to predict what earnings will be in a quarter or any given year, so while the long-term trends are very positive because the short-term earnings are very unpredictable, the stockmarket doesn’t like that and so tends to value them quite lowly.” But while changing food habits is one trend, food supply in general and the effect of freak weather remains a factor in the sector, with crops one of the most popular investments. Mr Robbins notes the ‘blue-chip’ option in this area is Monsanto, which develops genetically modified seeds to increase crop yield. “The only problem is we look at stocks for growth, quality and value, and it has got loads of growth and quality but it always looks very expensive, so we haven’t managed to buy that yet.” Instead, as a cheaper way to get exposure he highlights Bayer, a German pharmaceutical company with a division focused on crop sciences that has been growing very quickly. Mr Robbins adds: “Last year was very poor in terms of the harvest, particularly in America as they had a huge drought and a lot of corn was ruined. So currently corn inventories globally are very low. It will take several years of good harvests to rebuild those inventory levels… so we do like corn and any exposure is positive.” Ms Macpherson adds that from a valuation perspective, it has been a volatile 12 months for the sector, but one that has created opportunities. “A significant drought in the US saw soft commodity prices like corn, wheat and soy skyrocketing in the middle of 2012, only to sell off towards the end of the year and into 2013 on expectations that both South America and the US would harvest large crops.” However, Desmond Cheung, co-manager of the BGF World Agriculture fund, warns that investors can get very fixated on crop price developments when a lot of sentiment is already factored in improved supply and lower prices. “Investors should not really be taking the view that the market does not understand the supply improvement. In the past two to three years we feel people look at crop prices as a gauge on whether or not this sector is attractive, but it actually misses out a big part of the investment universe. “We think there is a lot of exciting medium-term development, especially in downstream and midstream firms that would offset some of those firms investors would have in the upstream sectors.” When looking at agriculture, it’s clear there are opportunities globally and with increased M&A action, investors need to take a look at the wider picture instead of only focusing on crop prices. Nyree Stewart is deputy features editor at Investment Adviser Continue reading
OECD Sees West Africa Agriculture Investment Boost on Population
By Isis Almeida – Jun 27, 2013 Agricultural investment in West Africa , the world’s largest cocoa-producing region, will grow “very significantly” by 2050 as the population expands and people move from rural areas to cities, according to the Organization for Economic Cooperation and Development. West African urbanization is increasing at the fastest rate in the world, Karim Dahou, an executive manager at the OECD’s directorate for financial and enterprise affairs, said today in an interview at a conference in London. Population in West Africa has doubled every 20 years since 1960 and in cities the number of people has tripled, he said. “In West Africa, the natural resources are conducive to huge agricultural output, there’s water, there are a lot of hydro-resources,” Dahou said at the Agriculture Investment Summit. “Our agricultural outlook by 2050 is very optimistic in terms of the growth of the sector globally, and including in Africa.” Investment in West African agriculture will expand as the world tries to meet growing local and global demand, he said. The amount of capital invested per farmer in Africa is “very low,” one sixth of that in Asia and one fourth of that in Latin America , according to Dahou. That’s the reason why yields for many crops in the region are stagnant, he said. Ghana and Nigeria are leading investments in agriculture in the region, he said. Nigeria, which spends $10 billion a year importing wheat, sugar, rice and fish, plans to boost domestic food production by 20 million metric tons by 2015, according to Akinwunmi Adesina, the country’s agriculture minister. Cash crops such as cocoa and coffee in West Africa won’t be under threat as the region tackles food security and may even facilitate access to food as they bring in revenue, Dahou said. There’s enough land available to expand and improve yields for both food and cash crops, he said. “The issue is not really space, it’s intensification,” Dahou said. “That’s what African agriculture, especially West African agriculture, needs.” To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net Continue reading
Early El Nino Warning Could Aid Farmers
Scientists have found a way to forecast El Nino weather events in the Pacific a year in advance, long enough to let farmers plant crops less vulnerable to global shifts in rainfall, a study showed on Monday. While far from flawless, the technique doubles current six-month predictions of El Nino, a warming of the eastern Pacific linked in the past to floods in Peru and Ecuador, droughts in Australia and Indonesia and maybe severe winters in Europe. “Better forecasting will mean farmers can adapt,” Hans Joachim Schellnhuber, head of the Potsdam Institute for Climate Impact Research and a co-author of the report with experts in Russia, Israel, Germany and the United States, told Reuters. El Ninos typically happen every two to seven years but scientists have been unable to find the causes of patterns that have occurred naturally throughout history and are among the most disruptive of extreme weather events. The new system, built on a network of temperature records around the Pacific Ocean since 1950, correctly spotted El Nino events a year in advance more than half the time and gave false alarms fewer than one year in 10. “We can develop a an efficient 12-month forecasting scheme, i.e. achieve some doubling of the early-warning period,” the scientists wrote in the US journal Proceedings of the National Academy of Sciences. Even though the new computer-based system is not always right, farmers might find it worthwhile to invest in drought- or flood-resistant varieties of crops when there was a risk of an El Nino in a year’s time. “Six months’ warning is too short. If you are a farmer in India, or in Zimbabwe or Brazil you have bought your seeds or even planted them. If you have a 12- or even 18-month early warning, you have a full agricultural cycle,” Schellnhuber said. Predictions of El Nino, part of a larger natural pattern known as El Nino Southern Oscillation, have often been unreliable. El Nino is Spanish for “the child”, named after the baby Jesus because it often appeared off Peru around Christmas. In September 2012, for instance, the World Meteorological Oganization saw a “moderately high likelihood” of an El Nino in the months ahead that did not materialise. It said last week that there were now “neutral” conditions in the Pacific. A separate report, looking at evidence for El Nino events in the growth rings of more than 2,000 trees stretching back 700 years, suggested that climate change was the cause of a rise in the number of El Nino events in the late 20th century. Writing in the journal Nature Climate Change, they also found that volcanic eruptions, which spew out particles that can affect sunlight, apparently affected El Nino cycles. That was evidence, they argued, that heat-trapping gases from burning fossil fuels could similarly affect the cycle. “We expect more strong El Ninos” overall this century because of rising concentrations of greenhouse gases, lead author Jinbao Li of the University of Hong Kong told Reuters. Reuters Read more: http://www.smh.com.au/environment/weather/early-el-nino-warning-could-aid-farmers-20130702-2p8lg.html#ixzz2Xty58I5h Continue reading
