Food is one of our most basic needs and agriculture has been central to human existence for thousands of years, yet the sector has always been curiously under-represented in investment portfolios.
Even today many parts of the agricultural value chain, such as farmland, are seen as alternative investments, while many investors steer clear of investing in commodities because of their volatility.
“Agriculture is a subject little understood by investors,” says Hélyette Geman, author of Agricultural Finance: From Crops to Land, Water and Infrastructure. “For academics in finance, it does not sound very glamorous and research in the field is scarce and belongs to economists.”
Henry Boucher, manager of Sarasin’s food and agriculture opportunities fund, agrees. “It is a bit of a Cinderella sector. People think it’s both boring and prone to price volatility,” he says.
Because of the volatility of commodity prices, it is easy to get caught out by chasing short-term price movements, but if you identify the long-term drivers, the sector offers real opportunities. These are not always obvious, however.
For example, Mr Boucher identifies electrification and the roll-out of infrastructure in emerging markets as two key factors for investors to consider. “Electrification has a huge impact on diet. If you have electricity, it’s suddenly worth going to a supermarket,” he says. “If you don’t have a fridge, there’s no point buying Ben and Jerry’s ice cream. And the arrival of rail can transform the viability of agricultural land.”
The longer-term future for agriculture and food is positive, says Roddy McLean, director for agriculture at RBS and NatWest. “We have all heard that global population will increase from seven billion to nine billion by the middle of this century,” he says. “Demand for food will increase faster than this as eating habits in developing countries change from a vegetable diet to sourcing their protein from milk products then to white meat [pig and poultry] to red meat. As you move through these dietary changes more land is required to produce the necessary food.”
Cedric Lecamp, senior investment manager of the agriculture fund at Swiss investment firm Pictet, adds that health and nutrition is now a key focus for the sector.
“The importance of the focus on health and nutrition is that it highlights that certain products and ingredients can be beneficial, while others are detrimental. There are exciting opportunities looking at the nutritional aspects of food,” he says.
“Fish is a very exciting area, for example. Technological developments mean that producers can use less food, making it possible to replace wild fishing with fish farming.”
Pictet, which has been running an agriculture fund since 2009, invests throughout the value chain, splitting the investment universe into three segments – upstream, midstream and downstream.
Upstream includes inputs to agriculture, such as seeds, fertiliser, machinery and technology for new areas such as precision agriculture. Midstream is food production, including meat, fish, animal feed and dairy, while downstream is the food processing industry.
Focusing on all three areas helps to smooth the volatility of the sector, explains Mr Lecamp, because the upstream sector does well if raw material prices are high, while downstream companies tend to perform better when prices are low.
“The upstream companies are positively correlated to prices. If the price of corn goes up, farm incomes go up and farmers spend more money,” he says. “But as you go downstream, the relationship to prices switches. Processors have significant fixed assets so they do best when harvests are good. Good harvests mean they can run at full capacity and also have the effect of pushing prices lower.”
Both Pictet and Sarasin have a strong focus on environmental factors that informs their investment strategies. This leads Pictet to invest only in sustainable palm oil companies and to focus on issues such as packaging, Mr Lecamp says.
“The amount of waste created in the agricultural world is huge, both on farms and downstream. Experts suggest that 30 to 50 per cent of agricultural produce is wasted. The value of that is huge and the further towards the consumer you move, the more value has been added to a product and the higher the cost of that waste.
The pressures caused by climate change and resource scarcity will benefit one sector in agriculture in particular – technology
“We look at ways to improve the shelf life of produce, such as breathable films or recyclable materials,” he adds.
Climate change is now a real risk for the sector, Mr Boucher points out. “Climate change is still very low on many investors’ agenda, but we pay a great deal of attention to it. Many people will wake up to the risks with a jolt before too long,” he says. “The idea that agriculture could pollute its way to higher productivity cannot go on for ever. There are real issues around monoculture and agriculture will come under massive pressure to use less water in future.”
The pressures caused by climate change and resource scarcity will benefit one sector in agriculture in particular – technology. “The agriculture sector will have to produce more food with less water, way fewer chemicals and with less impact on biodiversity,” Mr Boucher says.
This trend will benefit companies such as John Deere and Agco, makers of farm machinery, seed companies such as Syngenta and Monsanto, and those that offer equipment related to precision farming techniques such as drip irrigation or supply chain management.
“The agricultural and food industry in the UK has changed beyond recognition over the past decade thanks to the growing influence of technology. There have been major developments in both machinery on the farm and the IT systems which help streamline the business processes,” says Robert Frost, chief executive of Linkfresh, a provider of supply chain software technology for the food industry. “As the digital revolution continues, technology and IT is a major area of investment for the food industry.”
The other key requirement for farming is farmland, and it too can be a very good investment. “Over the decade to 2014, an apartment in the most exclusive part of Mayfair produced a 177 per cent return, while UK farmland returned 277 per cent,” says Ms Geman.
“Land is not made any more, in fact it is probably a diminishing resource due to infrastructure projects, building houses, erosion and, in some parts of the globe, desertification salinisation,” adds Mr McLean. “But if land is looked after properly, it tends not to wear out like many other investments. The current price of land of £8,000 to £20,000 per acre will in all probability appear cheap in two generations time.”
