The agricultural commodities sector had a number of tailwinds going into 2008: Inventories were low, poor weather had resulted in a bad crop year in Australia, flooding had impacted crop yields elsewhere. These were short-term factors and helped push prices up to the high levels they reached in early 2008. But demand dipped as the global economic slowdown began to bite, particularly in emerging markets and prices started to fall. Wheat, for example, is now down 27% on the year.
Gary Dugan, chief investment officer at Merrill Lynch Global Wealth Management, believes that the long-term factors are still in place and prices are likely to stabilise at a higher level even if they don’t reach the giddy heights of the first quarter.
“It depends how quickly the economic upheaval comes to an end, but by the middle of next year we should be looking at an upward trend.”
Population growth and rising living standards in emerging markets are established trends that are unlikely to be derailed by the current economic problems.
There are also new ways emerging to invest in the sector. A lot of new ETF products have been launched, which offer a direct way to invest in the commodity itself. Products targeting investments directly in agricultural land have been in development.
Nick Sketch, senior investment director at Rensburg Sheppards, says that this is the first time investors have been able to get direct access to agricultural land, which represents a ‘purer’ play on the agricultural theme.
“Syngenta and Monsanto, for example, may benefit from the increased demand for agricultural commodities, but there are a lot of other factors at work. The demand for food may not be reflected in the demand for fertilizer.”
The other major investment trusts in this area are the Ceres Agriculture fund, which invests in a portfolio of exchange-traded agricultural commodity contracts and derivatives, and the Eclectica Agriculture fund, which invests in agriculture-related shares.
Mark Bridgeman, manager of the Schroders Agricultural Land fund, believes the long-term outlook is still good and that the demand for agricultural land will remain strong.
“The macro drivers over the long-term are population growth and rising demand for food, coupled with limited supply. Other themes include aggregation, where small bits of land are bundled together and are therefore worth more than when they are apart. There is also price convergence, with mis-priced opportunities in a country or region. There are also frontier countries where land is under-utilised or not being actively farmed.”
The biggest risk to agricultural commodity stocks is that emerging market growth is completely undone by the problems in the US and developed markets. As yet, this hasn’t happened and emerging markets look to be weathering the storm with relative ease. The sector may take some time to rediscover its equilibrium, but the long-term trends hold firm.