The agricultural market is recovering after many years of disappointing results, and it has had several months of significant improvements, therefore, there are some good opportunities available for investors. We have spoken to Stephan Werner from DWS and Mayssa Al Midani from Pictet, to understand the key strategies and the ups and downs of investing in the agricultural market, and we also had the opportunity of looking at the principal allocations of the funds they manage.
Stephan Werner, Portfolio Manager DWS Invest Global Agribusiness
What is the current situation of the agricultural market? The strong rally in grain prices which has started in summer 2020, primarily driven by very strong Chinese grain imports, has lost some traction over the last couple of months. Still a US corn price of $5+ per bushel is significantly higher than the 5y average price. Therefore we have gained confidence in our view that Agribusiness companies should benefit in this environment, particular with increased corn and soybean demand from China and globally falling stock-to-use ratios.
Underlying agribusiness fundamentals have improved to levels not seen over the last seven years. Below seasonal average corn crop conditions in the US and the weaker Safrinha harvest (2nd corn crop harvest) in Brazil has limited supply this marketing season. We expect that this season we will have the strongest net farm income in the US since 2013, driven by higher grain prices, governmental support for US farmers and rising inflationary pressure.
Why is it a good time to invest in agricultural equities? Generally we see agricultural equities as a diversifier within the portfolio context. That means most of the time they trade independently of the global economy and every agricultural commodity e.g. corn, sugar, coffee or orange juice has its own supply & demand drivers. Given the significant fundamental improvements within the Agriculture market over the last 15 months after seven rather disappointing years, we think it is a good time to be invested in the agriculture value chain. Especially the Covid pandemic has shown how important logistics and a functional value chain is. The current inflation uptrend is also a tailwind for the sector.
General comment on the fund (goals, characteristics, opportunities in the sector, asset allocations) Within our global Agribusiness equity strategy we are able to invest in the full value chain of Agribusiness. Many companies are involved in this great industry, from seed and crop protection producers, fertilizer companies, tractor or combine manufactures, farmland operators or logistic providers are only a few to name.
The DWS Invest Global Agribusiness fund provides interested investors an easy access to the full value chain of Global Agribusiness. It is also one of the largest and oldest agribusiness funds globally with a solid track record over the last 5 years.On the strategy, the broadened investment universe of the fund provides many investment opportunities along the full value chain within Agribusiness. Not only traditional sectors as seed&crop protection producers, fertilizer or Ag equipment companies, but also including more remote sectors like online food delivery (which currently sees a tailwind from Covd-19), precision farming, healthy nutrition, higher value animal feed ingredients, protein producers (chicken, beef, pork and plant-based alternatives) or aquaculture. These are less or even negatively corelated with the traditional Agribusiness equities and should therefore perform independently of grain commodity prices. Although we still keep our balanced and broader approach to the Agribusiness theme as a whole, we have built up more upstream exposure over the last 12 months to reflect stronger Ag fundamentals in general.
Mayssa Al Midani, Portfolio Manager Pictet-Nutrition
Beyond ending hunger. The global population is growing relentlessly, forecast to reach almost ten billion by 2050. That equates to two billion additional mouths to feed. Meanwhile rising incomes mean that three billion people will enter the middle class by 2030, driving increased demand for protein. In total global food demand is expected to increase 60% by 2050. However our planet’s natural resources are finite and the escalating climate crisis means there is an urgent need to use less of these resources, not more.
Agriculture and food production already account for 40% of all land use and 70% of freshwater consumption, generating one third of global greenhouse gas emissions and representing 47% of all loss of biodiversity.
This puts our food system firmly at the center of the environmental and human health crisis, with a critical need for investment to drive innovative solutions. This will be in sharp focus at upcoming COP26 UN Climate Change Conference, which should act as catalyst to focus on a shift to a more sustainable food system.
According to the International Food Policy Research Institute, it may be possible to increase crop yields by 67% until 2050, reduce CO2 emissions by 50% and reduce the use of fertilizers and pesticides by 20%. To this end, manufacturers of agricultural equipment are incorporating GPS, remote sensors and data analysis, facilitating precision agriculture solutions and others are developing indoor vertical farm solutions.
In addition to the environmental challenges of dwindling resources, climate change and biodiversity loss that agriculture faces, there is a health crisis. The “double burden of malnutrition”, growing hunger and obesity, accounts for an increasing percentage of national health care expenses and the food industry is facing pressure to offer healthier products in a more sustainable way.
Thus, we need to meet the United Nations Sustainable Development Goal n°2 of ending hunger and work towards objectives around the promotion of sustainable agriculture, achieving food security and improving nutrition by 2030. In this regards, consumers and governments alike are increasingly demanding more sustainable, healthier food with lower levels of sugar, salt and saturated fats. Hence the appearance of companies facilitating food reformulations, improvement packaging, traceability, control and certifications and contributing to food waste reduction. Also, COVID-19 has accelerated these demands and pressures on the food industry to meet needs of consumers more and more aware of the correlations between diet and health and the nutritional and ethical aspects of what they eat and drink. The opportunity set in this space is substantial -roughly two trillion USD- that spans is areas such as agriculture tech (as precision farming), logistics (food distribution, food safety, food waste solutions) as well as food products, supplements and ingredients.
Also, advances in technology are allowing companies active across the food value chain to cater to government and consumer demands and to find solutions for a more sustainable food future.
In fact, recent months we have seen a rise in sales of healthier alternatives from supplements, probiotics and plant-based categories.
Agricultural Market investment opportunities
These are some of the best funds to invest in the agricultural market as per Morningstar Returns 5 years annualised:
Source: Morningstar 21/09/2021
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