Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Patrick Armstrong, co-head of multi-asset group Insight Investment
We believe that the recent rally in agriculture prices is not a short-term spike, but the next leg up in a broad commodity bull market.
Agricultural commodities have rallied in the past year, but lag other commodities over recent years. Supply and demand balances look very favourable for grains in the short and medium term, but with inventories at multi-year lows we expect new and more costly sources of marginal supply will be needed to meet rapidly-growing demand.
An expanding and longer-lived global population, with a rising proportion of meat in its dietary requirements, already makes a clear case for new incremental demand for agricultural commodities.
The current world population is 6.6 billion. By 2050 the United Nations estimates it will have grown to 9.4 billion. This will generate additional calls for all commodities, but more importantly we expect that further growth in GDP per head in developing markets will result in rising meat consumption among the emerging middle class in these countries.
There are one billion people in India and China who make about $375 per year. Although meagre by Western standards, their wealth is growing much more quickly than in the West. As this part of the population moves from a grain-based diet to a meat-orientated one, the consequences for feed grains will be profound. It takes 25kgs of feed to produce 1kg of edible beef. In terms of the acreage required, it takes 18 times as much land to feed a person with beef as with soy beans.
Meanwhile, clean fuel and renewable fuel goals have resulted in many governments introducing minimum targets for bio-fuel usage. The demand for ethanol and bio-diesel compounds problems of demand from a growing – and wealthier – population. So the question is how supply will meet demand.
We expect that with such significant new demand in the pipeline, yield expansion (more crops harvested per acre) will not be able to satisfy changing requirements. This means new land will need to be planted and hence the cost will rise. Agricultural commodities suffer from dis-economies of scale. As more demand forces new supplies, it comes with a cost.
Less fertile land will be planted and will require more fertilisers, irrigation and more intensive farming. This will push up the cost curve and higher prices will be needed to create the incentive for people to plant this acreage.
In addition, equities involved in farm equipment, irrigation, seed, planting, harvesting, protecting as well as grain and food processing, will be significant beneficiaries of the next wave of the commodity cycle. Limited farmland will generate a keen appetite for agrichemicals and new farming technology and logistics.
We have taken positions in wheat, soy beans, sugar and corn. All of these commodities are benefiting from the need for food, feed and fuel. It is important not simply to buy the standard agricultural indices to gain exposure, as these have not kept up with spot (cash) prices.
In terms of equities, if you want a diversified portfolio of equities in this sector, one exchange-traded fund on the DAX Global Agribusiness index may be worth considering, and that’s Market Vectors Agribusiness (US:MOO).
Alternatively, actively-managed funds on the same theme, from DWS (DWS Global Agribusiness) or Eclectica (CF Eclectica Agriculture), may also be worth considering.
The stocks Patrick Armstrong likes
Stock, 12mth high, 12mth low, Now
Market Vectors Agribusiness, US$54.95, US$40.19, US$53.35
DWS Global Agribusiness fund, +49 (0)1803/1011-1011; www.dws.com
CF Eclectica Agriculture, 0207 792 6400; www.eclectica-am.com