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Investing in Agriculture – How to Invest in Food

by David Garner - 02.07.2014

An Introduction to Investing in Agriculture

Investors of all shapes and sizes are investing in agriculture with increasing fervour. In this article we look at how to invest in order to gain the right kind of exposure to the sector. Read on to discover how to invest in agriculture, or, for a comprehensive review of the risks and opportunities for investors in the agriculture space, download our free PDF report.

Why is Agriculture so Popular with Investors?

In the current investing climate, defined largely by economic uncertainty, low interest rates and volatile equity markets; investors are seeking out assets and sectors that display certain characteristics. Of particular interest are assets supported by solid, long-term fundamentals. Assets that offer preservation of capital, low volatility and an opportunity to generate income mark highest. Throw in an investment performance that is not correlated to the performance of traditional financial markets and most boxes are firmly ticked. From investing in shares to investing in farmland, agriculture investments tick many boxes for today’s investors, and remain high on the agenda of both institutions and private individuals alike.

Looking to invest in agriculture? Request the Executive Summary document for Vaccinium (UK) Limited, our agricultural investment vehicle.

Rising Demand and Diminishing Supply – the Basis for Agriculture Investments

Demand for agricultural commodities is rising fast; population growth is occurring at the fastest pace in history with 80 million new mouths coming to the dinner table every year. Furthermore, super-size populations in developing economies like China and India are spending their rising incomes on food and energy; demanding a more resource-intensive, western-style diet.

At the same time, tens of thousands of square kilometres of productive land is lost every year to a combination of soil degradation, urbanisation and a changing climate, so expanding the area already committed to crops is not viable. Furthermore, agricultural productivity from the productive area that remains is also close to the limit of what is possible using current technology – with agricultural yields increasing at less than 1 per cent (1%) per year.

It is this backdrop of increasing demand for food, feed and fuel, coupled with a diminishing supply of productive assets that is causing value growth in base assets like land and commodities, making agricultural investments an essential component of a well-diversified investment portfolio seeking alignment with basic long-term fundamental growth trends.

In short, investing in the agricultural supply chain offers exposure to a sector-wide growth trend. Whether one chooses to invest in businesses trying to capture the increased capacity in the production, storage, logistics, processing or wholesale/retail of foods, or in physical assets such as farmland or commodities, investors with appropriate long-term exposure to the sector will be best-positioned to benefit from growing trends in basic global demographics and economics.

How to Invest in Agriculture

The agriculture sector offers a host of opportunities for investors to participate in the growth and income derived from the production, processing, transportation, storage and retailing of food and other agricultural commodity products. For most investors there are three broad asset classes to consider;

  • Agriculture Stocks – Direct Investments or Funds/ETFs
  • Commodities – Options, Futures or ETFs
  • Farmland Investments – Direct Investments or Farmland Funds

Whilst most investors will inevitably turn to the traditional access points (individual stocks and managed investment funds), there is a certain irony to this strategy. That is, one of the biggest drivers of interest in the sector is the supposed non-correlated fundamentals that support growth. Investors are, after all, seeking out assets that will weather the next financial market storm. Why then expose oneself to the sector solely via financial markets. Ultimately, investing in agriculture via stocks or other publicly traded assets offers some good exposure, but it is, for a large part, a bet on the sentiment driving those specific companies and assets.

Here we take a closer look at these asset classes, and look at some of the current options available to investors into 2015.

Agriculture Stocks – Investing in the Supply Chain

Buying shares in companies operating in the agricultural supply chain affords investors instant liquidity alongside exposure to sector-wide growth in the business of food production. Shares also fit well within the majority of tax efficient wrappers such as pensions and savings products (ISAs etc).

There are literally thousands of publicly traded companies with some degree of exposure to agriculture in one way or another. The list includes farming operations, chemical or machinery manufacturers, food processors, logistics companies, distributors (retail and wholesale) and many more. As the sector expands, well-managed companies that supply or participate in the sector might capitalise on this growth in demand for their products and services, generating value growth and income for shareholders.

See our top stock picks in our article on the best agriculture stocks for 2015…

Exchange Traded Commodities – The Commodity ETF

The ‘real asset’ cousin of exchange traded funds (ETFs), a commodities ETF provides investors with an opportunity to invest in specific commodities, or a basket of commodities, in order to try and capture rising prices.

The commodity ETF was initially designed as a simple, transparent and low cost vehicle that allows investors to buy and sell commodities via a public exchange, meaning you could invest in commodities without taking physical ownership and with relatively instant liquidity, and without having to go down the options and future route.

There are commodity ETFs that invest in just about any major agricultural commodity you could possibly think of; from cotton and cocoa, to wheat and corn, and this type of investment vehicle has seen huge inflows of capital as investors see it as an easy and accessible way to invest in the rising value of agricultural commodities.

But there are significant risks to consider. Commodities can be – and usually are – very volatile. Prices are affected by a range of variables other than increasing demand from a growing population. Weather, yields, global stocks, consumer trends, politics, trade policies, input costs, on-farm profitability, energy costs, and social impact events can all impact commodity prices, and so one should tread carefully and accrue sufficient historic and current knowledge on the individual commodities in which one chooses to invest.

See our top commodity ETF picks in our article The Best Commodities ETF Products for 2015

Farmland Investments – Investing in Food Production

For those investors taking a long term approach and seeking an asset class that delivers capital preservation, inflation hedging, income and an investment performance that is not impacted by the highs and lows of financial markets, investing in productive agricultural land might be the most appropriate option.

Farmland values have increased continually for years; regardless of what has happened in financial markets. Productive land in both the United Kingdom and the United States has posted strong capital growth and income throughout the most recent economic crisis, leading to this niche asset class outperforming all others apart from private equity.

The value of productive farmland is influenced by a number of on-farm and off-farm factors such as location, access, soil quality, water rights, political climate, ownership rights, access to logistics and storage infrastructure etc. but ultimately land values are set as a multiple of the income generated. Farmers will pay more to lease better land, and this higher than average income is reflected in the capital value of the asset. The same can be said for permanent crops such as fruits and nuts, where both farmers and investors will effectively pay a multiple of the farms net income.

Commercially viable farmland assets are large, often expensive, and require very specific expertise at both a sectorial and local level in order to assess and operate effectively. The high capital requirement often limits access to large investors, indeed a number of pension funds, university endowments and hedge funds have entered the market making substantial investments in various global regions. In fact institutional investors currently hold around $14 billion in farmland assets and most intend to increase their share of the asset class over the next five years.

There are some opportunities for smaller HNW investors to gain exposure to well-managed farmland assets without having to acquire an entire farm. DGC Asset Management develops underutilised land for the modern production of high value, demand-growth crops such as blueberries, and HNW investors may participate via Vaccinium (UK) Limited, its private investment vehicle.

Read more about farmland investments in our dedicated article here.

Agriculture Investment Funds

As already noted within this article, there are a number of asset classes to consider including; stocks, farmland and commodities. Whilst there are other avenues to explore, such as private equity or debt investing, these three make for the lion’s share of the market.

For most investors that are not particularly hands-on but do want to steer the direction and theme of their portfolio, buying into some kind of investment fund might be the most appropriate approach. There are a number of managed funds investing in all of the major asset classes mentioned above, including stocks, commodities, and even farmland.

You can read more on agriculture investment funds, including our top picks, at the following links:

Whether choosing to invest in agriculture via traditional financial markets, or preferring to head into the real asset space, the sector offers investors growth and income potential driven by basic demographic trends. It is a certainty that the sector will expand in order to accommodate 80 million new mouths to feed each year, but of course not all companies operating in the sector will flourish; so taking care in your stock selection is vital. Furthermore, not all arable land assets are productive, and specialist skills are required in order to properly assess the risk involved in farmland investing.

Related Articles

An Introduction to Investing in Agriculture
An Introduction to Farmland Investments
Agriculture Stocks – Our Top Stock Picks for 2015
Agricultural Commodities ETFs – Our Top Picks for 2015

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.