Investing in Agriculture
Investing in Agriculture
The world downturn has forced many investors to focus on the fundamentals. One of these fundamentals is that no matter how bad things get people still need to eat. Agricultural commodities have experienced major falls since summer 2008 yet many prices are still 30-50% above their average over the last decade. Why?
World population is increasing at a historically unprecedented rate. As recently as 1960 world population was only around 3 billion, it is now 6 billion and adding between 75-80 million people annually. That is a lot of extra mouths to feed. Unfortunately the amount of arable land under cultivation is only increasing by a small amount. Indeed in India and China it is decreasing as urbanisation increases and farmland is built on.
Existing land therefore needs to become more productive. In the twentieth century it was possible to rely on the so called “Green Revolution”- that was when the world’s food supply was tripled using chemical fertilisers, new varieties of crops and improved irrigation methods. Increasingly however this Green Revolution has been subject to the law of diminishing returns- increasing use of fertilisers and irrigation are no longer able to increase yields substantially. This has been behind the GM crops debate (the science of which is outside the scope of this article) and the need to find sufficient food for the 50% increase in worldwide food production required by 2030.
There are still opportunities out there for the prudent investor to benefit from over the coming years. Companies of particular interest should be those involved in grain, meat products and agrichemicals. However there are many different ways to invest in agriculture and some are much more risky than others. Some fund managers invest in commodity based derivatives based on whether the price of a particular commodity goes up or down. These can be extremely high risk. That is why during the banking crisis governments acted to ban derivative selling of banking shares.
The alternative “traditional” approach is of course to invest in the physical asset rather than trade a derivative of it. There are many small and medium size companies requiring investment in a sector that is still fragmented. This traditional approach is firmly favoured by HBS Financial Planning Ltd. It requires working with those who have on the ground knowledge taking into account aspects such as soil, climate, infrastructure and the local labour force rather than just a glossy prospectus. For example fund managers have often bought undeveloped land and focused on crop yield per hectare as a sign of the value of the land. Yet increased yield is often achieved by increasing drastically the amount of fertiliser applied, which has resulted in profitability problems as the fertiliser is expensive.
Agriculture is a sector with steady demand and increasing supply challenges- it offers an attractive investment proposition over the next few years.