Investing in alternative sectors – 2 agriculture investment ideas

Agriculture plays a crucial role in an economy. Its products are in everything we own, from the food we eat to the fabric in our clothes. It’s also an important source of livelihood.

The industry, like many others, has been under strain due to the pandemic. Travel restrictions hampered supply chains and disrupted food production. But even before the pandemic, the industry was under pressure.

As the world's population grows, so does food insecurity. Over 800 million people worldwide don’t currently have enough food to eat, and the population is expected to grow by almost 2 billion by 2050. The war in Ukraine is likely to intensify the problem further by restricting global food supply.

Other challenges to the industry include weather uncertainty, government regulation, rising costs, and a scarcity of available land.

However, some of the different agricultural sub-sectors have started to receive government support. We’ve also seen encouraging signs of progress toward making the industry more sustainable.

Demand is growing, but the sector’s still off the radar for some investors. It can be difficult to invest directly in things like farms, land or machinery, plus they can be hard to understand or value. But there are ways to do so, and it could offer some interesting opportunities.

It’s a specialist area though and comes with more risk. For investors considering this sector, we think it should only form a small part of a diversified portfolio.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

What are the potential solutions to ease industry pressures?

One of the greatest challenges for the industry is being able to do more with less. We need to feed a growing population with less available land, while reducing the impact on the environment.

Innovation in agricultural technology is likely to form part of the solution. ‘Precision Ag’ is currently being used to help boost crop yields, reduce water use and increase farmer profits. It combines historical data with satellite imagery to find the best areas and time to plant and harvest.

Seed technologies aim to improve crop quality and yield potential. More streamlined herbicides are being used alongside this to pinpoint crops that need spraying, rather than the whole field. The aim is to increase food production and reduce emissions.

Sustainable protein farming could be another solution. We’ve seen a reduction in arable land, so sustainable aquaculture, including salmon farming, is used as a potential alternative. This could help meet the increased protein demand, while lowering carbon footprints and reducing reliance on land.

Investments in certain feed activities is another way to improve sustainability. It can help reduce things like methane emission in cows, limit the amount of feed needed and improve animal health and welfare.

Sustainable arable and protein solutions, combined with advancements in technology, could offer some interesting opportunities for investors. But there’s a lack of infrastructure at the moment and these solutions need large amounts of clean power. The transition is likely to be costly and will take time. So, it’s important to take a long-term view.

More recently, all eyes have been fixed on the horrific events unfolding in Ukraine.

The Ukraine crisis and the impact on agricultural commodities

The tragic situation in Ukraine continues to change daily. Military, political, economic and humanitarian developments have been rapid. The crisis continues first and foremost to being felt by the people of Ukraine, and our overriding concern is for those directly or indirectly caught up in the invasion.

It’s also having effects on commodity markets. Prices for oil & gas have surged, but what about the impact it’s had on food and agriculture?

Ukraine is home to ‘chernozem’, a highly fertile black soil, rich in organic matter, that helps bolster the country’s production of key crops. Ukraine is arguably the leading country for arable land, which is one of the reasons it’s known as the ‘breadbasket’ of Europe.

It’s the number one exporter of sunflower oil, the second largest producer of barley (fourth in exports) and the fourth largest producer of potatoes.

Ukraine and Russia are global powerhouses when it comes to agricultural commodities. Collectively, they make up over a quarter of global wheat exports, 80% of sunflower seed exports and over 40% for barley. The conflict could have serious consequences for food security, which is already under pressure from climate change and the lingering effects of the pandemic.

The invasion of Ukraine has triggered a flood of sanctions from western countries too. They’re designed to cripple the Russian economy and cut it out of the global financial system. Although food products are excluded from most of the financial sanctions, there’s been an abundance of supply chain and logistical disruption.

Ports and airspaces are being closed in Russia and lots of supply ships are unable to sign new deals or gain insurance through fear of conflict or trade embargos. Several key Ukrainian ports have closed too, including some major trading hubs in the Black Sea.

How’s agriculture performed?

The agriculture sector has performed well over the long term. Because of our dependencies on the sector, it tends to hold up well in periods of uncertainty. There have been times though when it’s lagged behind the global stock market. Although past performance isn’t an indication of how it’ll perform in the future.

That said, the disruption to production and exports will impact consumers in terms of the availability of commodities and rising prices. Wheat prices have already hit nine-year highs and other commodities like maize, corn, soybeans, and palm oil have all surged in value.

There are also concerns the Russian invasion will worsen existing food shortages, driving prices higher. Bad weather in South America and labour shortages in parts of Asia are already limiting supplies. Disruption in both production and distribution could further shift the balance between supply and demand.

Other producers around the world will most likely be called upon to find ways to ramp up production to help bridge the drop in supply. But this isn’t likely to happen quickly.

Soft commodities, or products that are grown or reared, have generally done well. But other sub-sectors like fertilisers and agricultural chemicals have been under pressure. As Russia is a large exporter of both products, disruptions might limit the amount available. This could force prices higher, preventing some farmers from gaining or using as much as they need. The end result in more extreme cases could see yields fall by 50%.

The current market turbulence and uncertainty is reaching critical levels. High inflation rates have renewed interest from some investors in commodities to try to hedge against inflation and increase diversification to their portfolio. But there are numerous risks associated with investing in this sector. That’s why it’s best to take a long-term view and a specialist sector like agriculture should only make up a small part of a well-diversified portfolio.

Investment ideas

Investing in a farm, machinery or other parts of the agricultural industry can be difficult for investors. They can require big upfront investments or lengthy leases. But there are options.

Some real estate investment trusts (REITs) include farmland companies or agricultural machinery. They can offer more liquidity than owning a physical farm – meaning it’s easier to take your money out when you want to.

Open-ended funds are also an option, as they can invest in agricultural-related companies or types of agriculture commodities, including wheat, coffee beans or livestock.

Investing in agriculture isn’t right for everyone though. You should only consider an investment if it matches your objectives and fulfils a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest.

Let’s look at some examples.

Barings Global Agriculture

Barings Global Agriculture aims to grow investors’ money by investing across the globe and the agricultural value chain - from harvesting crops to having the food delivered to our tables. It mainly focuses on companies in the US, but also includes investments in parts of Europe, Asia, and some higher risk emerging markets.

James Govan, Clive Burstow and Piers Aldred are all named co-managers on the fund and have over 50 years of combined industry experience.

They aim to identify companies offering growth at a reasonable price – those with the potential to grow profits in the future, but without the expensive share price. This includes companies like agricultural manufacturer Deere & Company, speciality chemical provider Koninklijke DSM and Norwegian based salmon breeder, Bakkafrost. The managers also have the flexibility to use derivatives which can magnify any losses or gains, and therefore increasing risk.

While the fund has a diverse range of investments within the agricultural space, it’s concentrated. This approach means each investment can contribute significantly to overall returns, but it can increase risk. The managers have the ability to invest in higher-risk smaller companies and also have the flexibility to invest in high yield bonds, which if used adds risk.

Past performance is not a guide to the future. Source: Lipper IM, to 31/07/2022.

FIND OUT MORE ABOUT BARINGS GLOBAL AGRICULTURE INCLUDING CHARGES

VIEW BARINGS GLOBAL AGRICULTURE KEY INVESTOR INFORMATION

Pictet Nutrition

The Pictet Nutrition fund mainly invests in the US, with the rest invested across Europe, the UK and parts of Asia, including higher-risk emerging markets.

The team invests in companies that operate in the nutrition sector, with those that improve the quality, access and sustainability of food production. This can include companies of any size, like higher-risk small and medium sized companies.

The fund can be broken down into three main buckets – logistics, food and agri tech. Companies within these areas aim to provide sustainable solutions within the industry. Co-managers Mayssa Al Midani and Alex Howson also integrate sustainability into their process, focusing specifically on the Environmental and Social factors of ESG (environmental, social, governance).

Pictet Nutrition is an offshore fund that’s available to UK investors. Investors should be aware an offshore fund doesn’t attract the same regulatory protections as an onshore equivalent, including the protection from the Financial Services Compensation Scheme.

Past performance is not a guide to the future. Source: *Lipper IM, to 31/07/2022

FIND OUT MORE ABOUT PICTET NUTRITION, INCLUDING CHARGES

VIEW PICTET NUTRITION KEY INVESTOR INFORMATION

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