Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Jonathan Blake, investment manager, Baring Global Agriculture Fund, Baring Asset Management.
The investment outlook for agricultural equities is very positive. Short term, the improvement in grain markets, increased farmer profitability and stronger balance sheets should bode well for investment in agricultural products and services. Longer term, the fundamental drivers of growth include population growth, protein consumption in the emerging world and biofuels usage. Meanwhile, supply constraints will keep prices high, tempting more investment into the sector.
Agribusiness encompasses activities related to any commodities which are grown or raised (‘agricultural’ or ‘soft’ commodities). This involves a variety of activities, ranging from the supply of fertilisers and chemicals used to increase yields, through farming and logistical infrastructure to distribution, processing, marketing and retailing. Several quoted companies fall into the investment universe, whether directly involved in agribusiness or in a related activity. There are plenty of opportunities in the developed Western markets. But we also believe that many attractive ideas can be found in emerging markets, where they are often overlooked. In Asia, the emphasis tends to be on companies meeting domestic demand from the growing middle classes whilst Latin America has significant potential to develop into a major food exporting region.
The Baring Global Agriculture Fund has holdings in several companies involved in the production of fertiliser, such as Potash Corp (TSX: POT). Potash Corp is the world’s largest fertiliser company by capacity, producing the three primary crop nutrients (potash, phosphate and nitrogen). It was recently subject to an approach by miner BHP Billiton. We expect a strong recovery in potash demand in North and South America and increased commitments from China and India to lead to a meaningful increase in prices in 2011. And regardless of the outcome, BHP’s interest highlights both the long-term earnings potential of fertiliser companies as well as the relative attractiveness of current valuations.
We also like companies which look well placed to benefit from government support for agriculture. The Chinese government, for ex-ample, provides subsidies for the procurement of seeds, fertiliser and tractors, and offers food producers a number of tax advantages. US-based Deere & Co (NYSE: DE) is a good example of a company that benefits from this theme. As well as having an increasing presence in emerging markets such as China and Brazil, the company is the largest manufacturer of agriculture equipment worldwide. Demand in North America has been strong due to healthy farm cash receipts. At the same time, growth in the agriculture equipment market in Latin America should allow the company to benefit from a strong agriculture cycle in the region and also consolidate its mar-ket share position.
Selected logistics companies also look interesting. Take All America Latina (Brazil: ALLL3). The company is the largest independent provider of logistic services in South America and currently runs the longest rail network in South America, operating under concession agreements. The increased exports of Brazilian agricultural products and the growing use of fertilisers bode well for the future. Furthermore, our analysis suggests that the company is well positioned to compete for market share from trucking, as transporting produce by rail in Brazil is very cost competitive.