Emerging markets support agriculture sector

With emerging markets experiencing rising populations, increasing wealth and urbanisation, the subsequent change in their diet – away from carbohydrates and towards a more protein based diet with packaged products and processed food – is a critical driver for the sector’s growth.

On the supply side, the agricultural sector faces ever scarcer water resources, expanding cities and periods of extreme weather conditions. It is estimated that the world's population will have grown by 36 per cent to 9 billion people by 2050.

Urbanisation, for example, typically occurs at the cost of arable land, bringing with it water shortages and a rise in pollution, both of which impact the level of farming activity.

China's appetite for commodities will also be a driving factor. Currently, China is the world's largest importer of soya beans and cotton, and we are seeing a similar trend for corn. This year China made the largest purchase of US corn seen in recent years. This could point to the country losing its self-sufficient status in the future.

Yet while China's demand may contribute to a rise in global commodity prices, it will also stimulate the need for production-enhancing materials and equipment, such as fertiliser or tractors.

To take advantage of the current demand/supply imbalance and fully exploit the sector's potential, investments will have to be made across the spectrum of agriculture opportunities, for example in seed technology and irrigation systems, and in logistics for warehouses and transport routes.

Attractive equities from across the agricultural value chain should also be combined with agricultural commodities, via ETFs (exchange traded funds) or swaps on agriculture indices. It is also wise to invest in both 'upstream' equities (close to point of production) and 'downstream' equities (close to point of sale). This combined with commodities gives the ability for a portfolio to outperform in different commodity environments.

Current favoured stocks include Danone, whose fresh dairy and infant nutrition businesses make it a good investment. Globally, dairy consumption is growing and yoghurt has strong consumer appeal. As incomes rise and people increase their protein intake, dairy products generally rank high on that list.

Dirk Kubisch is product specialist at Swiss & Global Asset Management. The views expressed here are his own.