Bullish food forecasts whet  investors’ appetite

Forecasts of higher prices for wheat, corn and soyabeans over the long term are encouraging more investment managers to roll out agricultural funds in the UK.

So far this year, in spite of volatile market conditions, two funds with a focus on agricultural companies have debuted on the London Stock Exchange: BlackRock World Agriculture and First State Agribusiness, which is an onshore version of an Irish fund of the same name.

Both of these funds – which buy into palm oil and soyabean plantations, fertiliser, tractor and pesticide makers – are based on a simple assumption: food prices will continue to rise, as the tastes of the world’s growing population evolve, and the supply of arable land falls.

A change in diet among the new Asian middle class, and a need to develop more biofuels, are expected to push up the prices of corn, soyabeans, sugar and oilseed.

As Desmond Cheung, co-manager of BlackRock World Agriculture, says: “Demand for agricultural commodities is strong and it’s going to get much stronger. It has been outstripping supply for the last decade or so.”

These trends suggest that direct exposure to indices of wheat, corn and other soft commodity prices is a sound long-term strategy for private investors. But some managers advise inexperienced traders not to buy into exchange-traded funds, which track forward commodity prices, or commodities futures themselves.

“The problem with investing in commodities prices is you have no bloody idea where they are going,” said Ben Yearsley, investment adviser with UK stockbrokers Hargreaves Lansdown. Even skilled traders have found it difficult to turn a profit in the past 18 months because soft commodity prices have moved “sideways”, according to Jonathan Blake, manager of Baring Asset Management’s Global Agriculture.

Instead, the active fund managers’ approach is to buy into a mix of companies poised to benefit indirectly from rising food demand, as well as a pick-up in investment in the sector.

“Companies operating in the agricultural space should benefit from the increased investment in the agricultural asset class and also see profits rise if commodities’ prices rise,” concludes Baring’s Blake.

BlackRock’s fund holds shares in Potash, the Canadian fertiliser company (currently trading on 18 times forward earnings), Wilmar, the Singaporean palm oil plantation (15.8), and Deere, the US tractor maker (14.7). CF Eclectica Agriculture, which has been running for three years, has some overlapping holdings, and its top picks are Yara, a Norwegian fertiliser maker (11.9), Kubota, Deere’s Japanese rival (16), and Monsanto, the world’s largest producer of genetically engineered seed (22.5).

Many of these agricultural equities are also set to benefit from positive news in coming months. Demand for fertilisers is expected to rebound through the year and into 2011 as farmers’ financial positions have recovered in line with the wider economy. This improvement in their fortunes is also expected to boost sales of farm machinery such as tractors.

Better weather is helping, as well. George Lee, manager of Eclectica's Agriculture fund, describes atmospheric conditions in the past two years as “near perfect” in most regions. Indeed, the improvement in the weather has allowed farmers to restock inventory following the global food shortage scare of 2007. But Lee says stocks of agricultural commodities are still 10 to 15 per cent lower than they should be. “Higher prices will incentivise supply, which is not as abundant as people thought it was,” he argues.

In addition, demand from Chinese buyers remains strong, livestock prices are set to rebound from “near-record” lows and grain prices are forecast to soar, according to Rabobank analyst Luke Chandler. “I’m particularly bullish on grains as inventory levels have rebounded there,” he says. “Also, the Chinese want increasing amounts of oil seeds and they’ve started to import corn from the US for the first time in nearly 10 years.”

Private investors looking to gain exposure can choose from eight London-listed funds. Eclectica Agriculture is the only one with a three-year track record, according to Morningstar, but the performance of others has been robust in the short-term. Allianz RCM’s Global Agriculture Trust has gained 35 per cent in the past year while Pictet Agriculture is up 36 per cent and Amundi Fund’s Global Agriculture is up 32 per cent.