Investment headlines are full of the success of frontier markets – the record performer of 2014. But closer inspection reveals that frontier markets have been beaten by a couple of farmyard animals.
The Morningstar Livestock Commodity Index which tracks the price of cattle and pigs has returned 32% so far this year, compared to the MSCI Frontier Markets index which is up 25%.
Lean hogs and live cattle to give the commodities their proper names are experiencing a pricing boom thanks to a lack of livestock. A nasty virus has wiped out the porcine supply and cattle herds have been declining since the Seventies. As a result the ETFS Livestock ETC (AIGL) is up 24% this year.
The opposite is true for arable investment however. Thanks to near-perfect farming conditions and a lack of natural disasters this harvest is set to be a bumper one for both the US and Europe, meaning that the supply of grain is up and grain’s price is down. Corn and soy prices, two other tradable commodities are also down thanks to a glut of supply meaning the ETFS Grains ETC (AGGP) is down 17% since January.
Henry Boucher, manager of the Bronze Rated Sarasin Food and Argiculture Opportunities fund says these price fluctuations are common for agriculture investment – and the trends can reverse quickly. Within a gestational period hog supply will have recovered, and one freak weather event can wipe out crops entirely, making investing in soft commodities volatile and difficult to predict.
“Commodity buying is speculation rather than investment,” he said. “Agriculture commodity prices are dependent on trends that are unpredictable such as the weather.”
There have been periods when commodities steadily rose however. From 2004 to 2007 commodities had a fantastic bull run. The butter mountains were disappearing and in a bid to corner the market Goldman Sachs was buying up everything in sight, pushing up prices. Now however, commodity investment is fuelled by long term themes.
“In line with modern portfolio theory, adding commodities to a stock and bond portfolio has historically produced lower volatility and increased risk-adjusted returns,” says Morningstar analyst Kenneth Lamont. “The ETFS Agriculture ETC (AGAP) offers futures-based exposure to a diversified basket of agricultural commodities.”
Boucher prefers to buy equities that operate in the agricultural sphere rather than the direct commodities themselves – companies involved ‘from field to fork’ he summarises.
James Govan, manager of the Baring Global Agriculture fund also invests in equities rather than real assets. He sees opportunities within the fluctuating commodity prices of these assets. One such equity, Tyson Foods (TSN) makes up 7% of his fund. Tyson is the biggest meat producer in the US processing pork, chicken and beef – most of which the company supplies from its own farms, meaning it has an advantage over rivals who have to buy in expensive carcases.
Govan says that the best opportunities in agriculture investment currently lie within the protein sector – meat, fish and dairy. Cheap grain has had a positive influence on chicken farms, upping their yield for a fraction of the cost.
Distribution and processing plants have also benefitted; ethanol producers’ main input is corn, which has declined to $3 per bushel, the lowest price since September 2009.
Research by real asset investors Aquila Capital shows that climate change and depletion of agricultural land are big drivers of positive returns from agriculture investment – and that several large institutions have woken up to the opportunities in the sector and now invest in farms. The report lists sovereign wealth funds such as Temasek and the China Investment Corporation.
Detlef Schoen, Group Head of Farm Investments at Aquila Capital, explained: “There are powerful macro trends supporting farmland as an investment: every day, 30,000 hectares of farmland are lost as a net 200,000 is added to the world’s population.”
This growing population is also becoming increasingly western in their diet choices. The emerging middle class in Asia is eating more meat – good news for US exporters as well as new domestic farming companies. According to the Food and Agriculture Organisation, the world meat production is anticipated to grow modestly in 2014 to 311.6 million tonnes, and prices have remained high by historical standards for the past three years.
The Barings fund for example holds Chinese dairy companies in their fund, as well as Thai company CP Foods. The Sarasin fund holds WH Group a Chinese meat processor and distributor. Emerging markets are also consuming more chocolate – good news for confectionary manufacturers.
Sarasin manager Boucher says that it is not just changing diets in emerging economies that are creating investment opportunities. As European and American consumers strive for healthier lifestyles the price of salmon has increased – and as salmon can only by farmed in a few fjords in Northern Europe the supply is restricted meaning future price rises.
“The demand for chocolate in Asia has increases 10% a year, and global salmon demand increases 7% annually,” said Boucher. “Food is not the sexiest investment but it delivers attractive returns. You have to pick carefully but there are some fantastic opportunities to be had.”
