From grain to milk, as the costs of essential produce go up, cash in, says James Daley
Food prices have been rocketing over the past year, with the average basket of groceries now costing families almost 10 per cent more than it did last summer. According to the Office of National Statistics, food prices increased by 8.7 per cent in the year to the end of May, with some items seeing increases well into double digits.
Although the price of wheat has come back slightly after hitting all-time highs earlier this year, the price of a loaf of bread is still up by around 20 per cent over the past year, while the prices of other foods such as soya beans, corn and cocoa have risen by at least 25 per cent. Furthermore, after a bad spell of weather in the US over the last few weeks, prices have been on the up again, as investors have been forced to accept that 2008 will not be the year that provides the bumper crop they were hoping for.
For most families, there's no way of avoiding these food price hikes, and for some, there's been no choice to but to make spending cuts elsewhere – not eating out as often and buying fewer luxury foods.
However, rising food costs don't have to be a one-way ticket to poverty. For investors with some savings to spare, there are now an increasing number of commodity funds, which are positioned to benefit from the increase in the price of grains and soft commodities such as sugar, cocoa and coffee.
"We're all going to be suffering from the higher food costs, so investing in agriculture is a nice way to get a little back," says Matthew Sena, the co-manager of Castlestone Management's Aliquot Agriculture fund. Although some prices have already risen a long way from their lows, Sena believes grain and soft commodity prices are likely to continue increasing for at least the next three years, pointing out that there are a number of longer-term factors – such as the world's growing population, and the shortage in high yielding farm land – which are driving the boom.
Over the past 30 years, the world's population has grown by more than 50 per cent to over 6 billion, and is expected to increase by the same proportion again by 2050. Yet the world's food supplies are failing to keep up. Many of the farms in developing countries produce small yields, and need help and more modern farming equipment to help them produce larger amounts of produce.
And while there is still plenty of undeveloped land around the world, which may be suitable for agricultural expansion, it takes many years to cultivate it so that it will produce a good yield. Meanwhile, the increase in demand for biofuels is also distorting the agriculture market, as increasing numbers of farmers are being incentivised to sell their crops to create biodiesel or ethanol.
Henry Boucher, the manager of Sarasin's AgriSar fund agrees that the fundamentals make for a good investment story. "The underlying drivers are not going to go away – such as population growth and diet change," he says. "For example, if you look very simply at the way wealth is spreading through the globe – people are now eating a lot more meat, and so farmers are needing a lot more grain to feed their animals."
Over the last 40 years, the amount of meat being eaten by the average Chinese person has increased by two and a half times, faster than farmers have been able to increase their production.
"There's a lot more indulgent foods such as chocolate being consumed," adds Boucher. "China and India are now consuming dairy products in large quantities for the first time."
Boucher's fund invests in companies which participate in all corners of the agricultural system – "from field to fork", as he puts it. His mandate allows him to invest in stocks all over the world. Hence, as a means of getting exposure to the increasing dairy consumption in Asia, for example, he has bought shares in the Russian food company Wimm-Bill-Dann, which has been selling increasingly large quantities of dried milk into China over the past few years.
However, at the other end of the scale, he invests in companies which give him exposure to the rising price of agricultural land, as well as looking at companies that may profit as a result of the world's fast-changing dietary habits.
"We're very interested in obesity and the diseases which come with it such as diabetes and kidney disease," he says. "If there's going to be an increase in the number of people suffering from kidney disease, that means dialysis will become more important, so we've invested in a company called Fresenius, which makes dialysis equipment."
Water is another area in which Boucher is interested. "We've seen the monetarisation of carbon, with the cap and trade system, and I think we'll now see the monetarisation of water," he says. "It's a scarce resource, which is too often abused."
Unlike Boucher's fund, Sana invests directly in the commodity markets, such as soy oil, coffee, orange juice, corn, wheat and also cattle and hogs. In the short-term, Sana says that out of these he prefers the grains – such as soy beans and corn – after farmers of these crops in the US suffered a bout of bad weather that damaged much of their potential harvest. For the corn, it is already too late to replant, and there are fears that 2008 may yet be another lean harvest.
Although he admits that all the commodity future markets can be very volatile – in part driven by an increase in the number of speculators, and a lack of good information – he insists that this does not take away from the longer-term underlying investment story of the products.
Aside from the strong investment story, another good reason to consider agriculture funds is for their diversification benefits. The performance of commodities has historically been uncorrelated to other asset classes, such as equities and bonds, meaning they will usually provide some positive returns for your portfolio at times when the other parts are struggling.
"It's beautiful as an asset allocation play," says Sena. "But over the last eight years, it's also come back as an asset class that people are investing in for the investment story, not just for diversification."
How to invest
There have been a number of commodity fund launches over the past few years, as fund managers have moved to take advantage of investors' appetite to cash in on the food price boom. Schroders was one of the first mainstream fund managers to do so, launching an agriculture fund at the end of 2006. It proved so popular that after raising some £3bn in assets, it elected to close the fund to new business a few months ago.
However, there are other funds out there. Castlestone Asset Management offers an agricultural fund that invests directly in the commodity markets. Alternatively, Sarasin's AgriSar fund invests in stocks related to all aspects of the agriculture industry. Allianz launched its own Global Agricultural fund in April, while Eclectica Asset Management followed a month later. Baring Asset Management is planning a similar launch in the autumn.
Beware, however, that if you do decide to invest in commodity funds, the charges can be high.
If you're looking for a cheaper option, consider investing directly in a basket of commodities – or even individual crops – via an exchange traded fund (ETF). ETF Securities offers a range of ETFs that invest in commodities, including some that allow you to "short" a certain commodity (ie make money when it falls in price). They charge just under 0.5 per cent a year. But if you decide to invest in an individual commodity, be aware that these can be very volatile.
If you're looking for a less risky option, try a structured product, such as those offered by Dawnay Day Quantum. These offer investors some capital protection if prices fall, as well as up to 150 per cent of any upside if prices rise.
MOST INDUSTRIALIZED COUNTRIES HAVE AN ECONOMY BASED ON SERVICES. Do you think it's safe to invest in agriculture for a long period of time? Post your comment(s).
