Global agriculture promises strong returns, says Barings
Increasing demand for food, fuel and feed in developed and developing markets will continue to drive strong returns for equity investors in the global agricultural sector, according to Baring Asset Management, the international investment firm.
This year has seen robust performance from the sector, with the Baring Global Agriculture Fund returning 8.1% year-to-date, according to Morningstar. The fund outperforms its benchmark, the DAX Global Agribusiness Index, which at 30th September 2012 stood at 6.3%.
James Govan, co-manager of the Baring Global Agricultural Fund, said: “Global population growth and key development trends of increasing meat and fish consumption should provide a robust soft commodity backdrop and hence strong demand for agricultural products and services over the long term. We believe that agricultural equity valuations are compelling, particularly in upstream sectors such as fertilisers, farm machinery, plantations, seeds and crop protection.”
Crop prices have soared in the summer as the drought and heat wave hit the key growing region of the US Mid West and reduced harvest estimates after a promising start. However, despite reduced volumes US farming economics are excellent and the US Department of Agriculture has forecast another record year of profitability for the US farmer.
James Govan said: “The reduced US harvest estimates have resulted in grain and soybean inventories remaining low compared to consumption from an historical perspective, giving us confidence that grain and soybean prices are likely to remain strong. The focus of the market will now switch to South America where planting is already underway. Farmers have every incentive to maximise production in this buoyant crop price environment, which Barings believes should result in strong demand for fertiliser, crop protection and seeds. High farmer profitability could also result in robust demand for agricultural machinery as has been evident in recent industry sales in the US.
Over the long-term, Barings maintains its core view that significant investment in agriculture, both in terms of land and agricultural goods and services, is required to meet the rising demand for food. The global population now stands at around seven billion and the United Nations expects this figure to grow to over nine billion by 20503. “This means than in less than 40 years we will have two billion more mouths to feed, with three-quarters living in the developing world,” Barings said.
Govan added: “From an investment point of view, Barings continues to seek to identify the best performing industries in a scenario of strong soft commodity prices. We have maintained a positive bias towards companies within agricultural machinery, fertilisers, seed and crop protection given the robust soft commodity prices and consequent positive demand environment for these companies. In the midstream of the agriculture value chain, we have exposure to grain and edible oil processing companies, such as Bunge, which has significant assets in South America and has the potential to benefit from the large harvest expected in South America.”