Sarasin's Henry Boucher on why the agriculture sector is so compelling
After many years of being ignored, the agricultural sector finally recaptured investor attention in 2007 when weak harvests drove grain prices sharply higher, causing food shortages and riots in around 50 countries worldwide.
Prices have since stabilised, but the drivers behind the spike remain in place and make the food and agricultural arena a compelling opportunity. This is reflected in the growing wave of warnings from government and non-government agencies, leading scientists and economists of the risk of food crises sparked by resource constraints.
Population
Faltering house prices and recovering banks still dominate the developed country economies of Europe, North America, Australia and Japan. In terms of global GDP this is enormously significant, but in population terms it is much less so. These countries represent only a billion people out of a total global population of 6.7 billion. For a vast majority of people in the world incomes are rising from low levels and standards of living are improving: in particular, people are eating more and experiencing a much more varied and nutritious diet.
More meat, fish, cereals, dairy products, fruit, vegetable and palm oils, wines and spices – year by year the demand increases as the average calorie intake per person rises. But the population is not static. It has grown by a billion over the past 12 years, and the United Nations expects it to keep growing by more than 60 million each year for the foreseeable future.
Energy consumption
Layer into this pattern the world’s enormous and growing energy consumption. The need to develop renewable energy technologies is clear, and biofuels processed from food crops have emerged as a major source of fuel. While the volume of agricultural produce used for biofuels is still relatively small in terms of production, government mandates across the world target significant growth in biofuel production and put further pressure on an already-tight supply chain.
It is hard to measure actual growth in the demand for food, but the Food and Agriculture Organisation (FAO) has estimated meat production will have to almost double from 270 million tonnes to 470 million tonnes by 2050. The FAO has also estimated that by the same year cereal production, in part driven by the growing need to turn crops into biofuels, will have to more than double from the current figure of almost a billion tonnes.
Growth concerns
There are two routes to increasing production: (1) raising the area of land under production and (2) improving yields per hectare. However, total global agricultural land has expanded by only 0.24% per annum since the early 1960s, and little farmable land remains to be brought into production. In some areas, China particularly, land is being lost each year as nutrients are leached out of the soil and the ground turns to desert.
The majority of this production growth must therefore come from increased agricultural productivity. In the 1970s the world experienced a “green revolution” when agricultural production expanded dramatically through equipment advances and the development of better-quality seeds, fertilisers and irrigation. Now we must achieve the same advances but water scarcity and concerns over chemical applications mean farmers will actually need to reduce rather than increase inputs. In a sentence: we need to increase food production by 70% by 2050, using the same amount of land, fewer chemicals and less water.
For investors seeking exposure to this powerful theme there are three potential entry points.
Firstly, they can buy or lease land and either farm themselves or rent the land to a farmer. This can generate a yield and, in the case of land ownership, potential capital appreciation. However, the land market is illiquid, and countries that offer the highest capital return from land are often associated with political risk.
Secondly, investors can trade soft commodities through the futures market. While this offers liquidity, crop prices can be highly volatile and subject to speculation.
Finally, investors can buy food/agriculture-related equities. The global universe of agricultural stocks across the value chain “from field to fork” is vast, and in both production and consumption of food there lies a very wide range of exciting investment opportunities. If the increased volume of farm produce is to meet the rising demand for food there must not only be better seeds, agrichemicals and equipment but growth in infrastructure, trading, transport, processing and retail – all areas we regard as part of the agriculture story.
We believe the performance of equities driven by growth in agriculture could be very different from wider equity markets over the long term and less affected by trends in the global economy. The pressures of climate change, water scarcity, energy shortages and trade battles can also present risks of sudden interruption to food supplies and prices. After a 25-year period in which agricultural prices were stuck in a trading range, we have entered a new era in which higher returns can be earned and are necessary not only to finance new investment in productivity but to feed the world.
Henry Boucher is manager of the Sarasin AgriSar fund
