Provider View: Demand Is Growing Fast

Numerous firms fall into the agriculture investment universe – and most offer opportunities By Jonathan Blake | Published Jul 01, 2013 Demand for agricultural resources, products and technologies is set to rise significantly, driven by a fast-developing global population. Against this backdrop, the investment case for agricultural equities continues to be driven by sustainable global demand on one side and the instability and inadequacy of supply on the other. As such, the business of feeding the world merits consideration for any well-diversified, long-term investment portfolio. The United Nations expects the world’s population to grow to more than 9bn by 2050. This means than in less than 40 years we will have 2bn more mouths to feed, with three-quarters living in the developing world. Food preferences are changing too. As individuals become wealthier, their eating habits tend to alter, with meat and protein consumption often rising sharply. This is what is happening in the large emerging markets of India and China, where demand for chicken and pork is growing. Since grain and other types of feed are major cost inputs in the production of meat, it is expected that changing dietary habits will lead to continued upward pressure on grain prices. More than that, well-supported commodity prices have also improved farming economics and provided a strong incentive for farmers to maximise output. This will continue to have positive implications for companies involved in a number of related industries such as agrochemicals, agricultural machinery and grain-handling and processing services. At the same time, there is rising interest in alternative energy sources such as biofuels, where agricultural products are the main inputs. In this area, demand will be well supported by a combination of high oil prices and regulatory incentives, as national governments continue to introduce subsidies and output targets. An environment of rising commodity prices tends to be a supportive one, but other related industries can also do well at different points in the economic cycle. For example, in an environment where soft commodity prices moderate, ‘downstream’ assets, such as processors, manufacturers and food retailers, offer interesting opportunities. These industries tend to be more defensive, as firms generally have the ability to maintain prices, even if input costs fall. Moreover, while there are plenty of opportunities in the developed western markets, many attractive ideas can be found in developing economies around the world. In Latin America, for example, there is significant potential for the region to develop as a major food exporter. Overall, a large number of quoted companies fall into the ‘agriculture’ investment universe, whether directly involved in agribusiness or in a related activity. Jonathan Blake is head of agriculture at Baring Asset Management Taylor Scott International