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Agriculture Funds – An Introduction and Top Picks

by David Garner - 02.07.2014

An Introduction to Agriculture Funds

This article offers a broad introduction to various agricultural investment funds. We explain how to choose the most appropriate agriculture fund for you, and look at our top picks for mutual funds, farmland funds, and commodities ETFs. For a more comprehensive analysis of the fundamental drivers and risks associated with investing in the agriculture sector, we highly recommend you download our Free PDF Report.

Why are Investors Turning to Agriculture?

In a global economy as fast-paced as today’s, it is essential for those with a need to maintain or grow their wealth to be aware of and understand developing social, technological, demographic, and economic trends, and to position themselves and their investments accordingly. Most of those that stay ahead of the curve continually readjust their strategy and approach, diversifying into new sectors and assets classes.

One sector that has experienced a huge surge in private investment in recent years is agriculture. Whether investing in the stock market, commodities, land and farms or private equity, the interest from investors is significant and growing. Little wonder given the sectors’ essential nature.

How to Choose the Right Agriculture Fund

There are a number of considerations when choosing an agriculture fund. Undoubtedly most investors will plump for a fund of some sort because they are accessible, they fit well within tax wrappers such as pensions and savings products, they are highly liquid, regulated, and there are plenty to choose from. But with such a wide variety of structures, asset classes, investment strategies and fund managers, how do you choose the most appropriate fund for you?

First off, here are some of the key considerations when choosing a suitable type of fund:

  • Asset Class (equities, commodities, land, etc.)
  • Investment Strategy (long/short etc.)
  • Regional Exposure
  • Sub-Sector Exposure (farmers, processors, chemicals etc.)
  • Diversity within the Fund
  • Investor Requirements (Liquidity, capital, balance etc.)

In order to narrow down the options, there are four sensible steps that investors can take in order to select the most appropriate agriculture fund.

  • Understand the Opportunity within the Sector (Free PDF Report…)
  • Take a View on How to Invest (securities, commodities or land)
  • Take a View on Where to Invest (farmers, processors, logistics etc.)
  • Select the Appropriate Type of Fund from the List Below

Four Types of Agricultural Investment Fund

  • Mutual Funds
  • Commodities ETFs
  • Agricultural ETFs
  • Farmland Funds

Whether it be mutual funds, commodity ETFs, agriculture ETFs or farmland funds, all offer a different set of characteristics, risks, drivers, correlations, and investment performance. Here we address the advantages and disadvantages of each in more detail, and give you our top picks for the best performing agriculture funds for 2015.

Mutual Funds that Invest in Agriculture

For smaller investors with less risk capital, mutual funds might be an appropriate option. Minimum investment levels are typically low, liquidity is good, and mutual funds are typically well-managed by experienced fund managers.

Mutual funds invest in the securities of publicly traded companies. For the most part they will invest in stocks and bonds, but may also buy more complex financial instruments and derivatives in order to hedge certain strategies or balance out risk.

On the downside, just like individual agriculture stocks, the performance of mutual funds shares a stronger correlation with financial market performance than with global demographic and economic trends. A sharp downturn in the stock market would see the value of an investment tumble overnight, and so this method of investing does not offer a non-correlated investment performance.

See our Top Picks for Agriculture Mutual Funds…

Investing in Commodity ETFs – Beware of Volatility

Much of the early uptake of investor capital into agriculture has been in Commodities ETFs (properly referred to as exchange traded commodities or ETCs) as investors have sought to capitalise on rising commodity prices. Quite simply, these are exchange traded funds that can hold assets such as commodities, and trade on a stock exchange in order to provide liquidity for investors.

There are two broad types of Commodity ETF; those that actually own and hold the physical commodities (most gold ETFs are a good example), and those that trade futures and/or options. There are also those that do both. Some ETFs invest in a basket of agricultural commodities, whereas others specialise in one particular commodity such as wheat, cotton or cocoa.

This type of investment might be appropriate for those taking the view that rising demand will push up the value of certain commodities such as Soy, wheat or corn. The fact that ETFs can be bought and sold within the day also adds value and allows hands-on investors to remain reactive to market conditions.

Commodities, however, are volatile, and prices are driven by a whole host of factors. Weather conditions, global stores, planting volumes, harvesting issues, political and trade policy. All of these things have an impact on short term commodity pricing, and it is just as easy to lose your shirt and to make a fortune in pretty short order.

See our Top Picks for Commodities ETFs…

Agriculture ETFs – A Liquid but Volatile Alternative

Just like the Commodity ETFs mentioned above, Agriculture ETFs are exchange traded funds – investment funds you can buy and sell on a stock exchange – only these invest in stocks rather than commodities.

Investing in ETFs is a bit like investing in a mutual fund but with the added bonus (and risk) of rapid liquidity. Why risk? Well, as noted previously within this article, the value and performance of publicly traded instruments such as equities (and the funds that invest in them) is driven to a large extent by investor sentiment rather than the underlying fundamentals of the market, sector or individual companies. Again, as with other traded investments, agriculture ETFs provide good sector exposure, but do not protect investors from the next financial crisis or big stock sell-off.

See our Top Picks for Agriculture ETFs for 2015…

Agricultural Land Funds

For those wishing to truly capture the long-term fundamentals that are driving up the value of agriculture, investing in well-managed, productive agricultural land offers the best opportunity but of course, there are a host of issues that have hitherto prevented mainstream access to what is now an emerging asset class.

Farmland has outperformed the vast majority of other asset classes for some considerable time, especially over longer timelines. It is a finite asset where the current stock is diminishing with no way to renew, and its essential nature means that, in the long term, the existing stock of productive land will continue to become more and more valuable as demand for food increases and the productive area of land decreases.

Farmland however is not without risk. As any Farmer. And the illiquid and expensive nature of the asset, combined with the need for niche operational expertise, makes this area a risky and expensive business for individual investors. Enter then, the Farmland Fund.

There are a few farmland funds in existence. most however are restricted to larger investors with at least £1 million. opportunties for smaller investors have thus far been limited, but some are now emerging.

See our Top Picks for Farmland Funds in 2015….

In Summary

There are all sorts of entry points to the agriculture sector for Investors to consider, each of which is driven by a different set of fundamentals and will react differently to different market conditions.

Despite the fact that by far the most commonly held investments are commodity ETFs, this has been predominantly due to the fact that, on the face of it, investing in commodities provides direct basic exposure to the sector, but digging a little deeper this thinking is fundamentally flawed. Each commodity is subject to a wide range of drivers, some of which are specific to that particular commodity, and unrelated impact events in politics, climate, and financial markets will drive prices up and down, regardless of a growing global population and diminishing asset base.

As investors become more aware of the intricacies of the sector, interest has widened to include equity investments and land investments, the latter of which is the least accessible but perhaps displays the strongest correlation with the underlying themes that establish our interest in the first place. Now we are beginning to see the market react, and a number of alternative opportunities have emerged such as farmland funds and niche private equity style transactions designed to better capture the long-term growth in value that investors are seeking and offer stake in the underlying assets that form the cornerstone of the agricultural economy; the land itself.

For more information on opportunities to invest in productive farms producing a range of high value high demand commodities, please register your interest and request an Executive Summary.

Written by David Garner

David is a Partner with leading UK based real estate investment consultancy DGC Asset Management Limited. Since 2001 David has advised Investors on a range of niche real estate acquisitions and developments in the agriculture and distressed asset space with a gross development value exceeding £100 million.