Investing in agriculture – two options for investment

Travel restrictions hindered supply chains and disrupted food production. But even before the pandemic, the industry was under pressure.
Josef Licsauer

Fund Analyst

Hargreaves Lansdown

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As one of the oldest standing trades, agriculture plays a crucial role in an economy. Its products are in everything we own, from the food we eat to the fabric in our clothes.  The industry, like many others, has been under strain due to the pandemic. Travel restrictions hindered supply chains and disrupted food production. But even before the pandemic, the industry was under pressure.

The Ukraine crisis and the impact on agricultural commodities

The tragic situation in Ukraine continues to change daily and the conflict has significantly impacted certain commodities like oil & gas. But there’s been less talk around the impact it’s had on food and agriculture. Ukraine is home to ‘chernozem’, which is highly fertile black soil, rich in organic matter, that helps bolster the country’s production of key crops. Ukraine is arguably the number one country in terms of arable land. It’s the number one exporter of sunflower oil, the second largest producer of barley and the fourth largest producer of potatoes.

Ukraine and Russia are global powerhouses when it comes to agricultural commodities. Collectively they make up for over a quarter of global wheat exports, 80% of sunflower seed exports and over 40% for barley. The conflict could have serious ramifications for food security, which is already under pressure from climate change and the lingering effects of the pandemic.

Although food products are excluded from most of the financial sanctions affecting Russia, there’s been an abundance of supply chain and logistical disruption. Ports and airspaces are being closed in Russia and many supply ships are unable to sign new deals or gain insurance through fear of conflict or trade embargos. Several key Ukrainian ports have closed too, including some major trading hubs in the Black Sea.

Agriculture performance

The disruption to production and exports will impact consumers in terms of both availability and rising prices of commodities. Wheat prices have hit nine-year highs and other commodities like maize, corn, soybeans, and palm oil have all surged in value. There are also concerns that the Russian invasion will worsen existing food shortages, pushing prices higher. Adverse weather conditions in South America and labour shortages in parts of Asia are already limiting supplies. So disruption in both production and distribution could further shift the balance between supply and demand.

Continued conflict will add pressure to an already struggling industry, which is still recovering from the effects of the pandemic and the imposing impact of climate change. Couple this with rapidly rising inflationary pressures and food prices are set to soar. That said, things are changing daily. After initial surges, western sanctions and delayed decisions from NATO in some cases have caused agricultural commodity prices to drop significantly.

Funds to consider

Sarasin Food and Agriculture Opportunities

The Sarasin Food and Agriculture Opportunities fund invests in companies around the world which have exposure to food and agricultural sectors. It mainly invests in the US, Europe and the UK, but also invests in emerging markets, which increases risk.

The co-managers Jeneiv Shah and Colm Harney look to invest in long-term trends that impact the global food and agriculture economy. They favour larger companies but also have the flexibility to invest in higher-risk small and medium-sized companies. Some of these companies can be less liquid in stressed market conditions.

Since Shah took over in 2017, the fund has returned 18.17%. This is over a relatively short timeframe though, and there have been periods of volatility – most recently in March 2020 when the pandemic arrived.

 28/02/2017 To 28/02/201828/02/2018 To 28/02/201928/02/2019 To 29/02/202029/02/2020 To 28/02/202128/02/2021 To 28/02/2022
Sarasin Food & Agriculture Opportunities12.49%2.87%-4.44%16.05%-2.14%

Source: *Lipper IM, to 28/02/2022

Pictet Nutrition

The Pictet Nutrition fund mainly invests in the US, with the rest invested across Europe, the UK and parts of Asia, including higher-risk emerging markets. The team invests in companies that operate in the nutrition sector, including those that improve the quality, access and sustainability of food production. This can include companies of any size, including higher-risk small and medium sized companies.

The fund can be broken down into three main buckets – logistics, food and agri tech. Companies within these buckets aim to provide sustainable solutions within the industry. Co-managers Mayssa Al Midani and Alex Howson also integrate sustainability into their process, focusing specifically on the Environmental and Social factors of ESG, (environmental, social, governance).

Since Midani took over in 2018, the fund has returned 20.14%, though this is a short timeframe and there have been setbacks. Performance struggled at the beginning of 2020 due to the pandemic, but picked up pace in the latter half of the year because of increasing industry demand.

 28/02/2017 To 28/02/201828/02/2018 To 28/02/201928/02/2019 To 29/02/202029/02/2020 To 28/02/202128/02/2021 To 28/02/2022
Pictet Nutrition8.06%1.80%3.29%25.97%0.96%

Source: *Lipper IM, to 28/02/2022

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Investing in agriculture – two options for investment