Eclectica sorts wheat from chaff in agriculture world

The Eclectica Agriculture fund is a long-only fund with assets under management of £202m that invests solely in agricultural stocks and not in futures or commodities, which is unusual in the market.

Manager George Lee claims that agricultural stocks are in the middle of an "up cycle" which is likely to last another eight years.

"Typically, history shows us that in the agricultural space there is a 38-year cycle. Twenty-five years of this is a down cycle and 10 years is an up cycle," he says.

"We are predicting that the commodities boom will last between five and 10 years from now."

About 40 per cent of the fund is invested in North American equities, about 10 per cent in South American; about 20 per cent in European and the remainder in Australia and Asia.

At times, the fund is invested in collective investment schemes for the purpose of capital growth. Currency hedging can be used.

"We decided on a global fund to take advantage of the many opportunities that are available in agriculture worldwide," says Mr Lee.

"This allows the managers to take advantage of broader worldwide opportunities, such as the higher land yields in developing markets like eastern Europe," he adds.

Fertiliser stocks are favoured holdings as they play a pivotal role in agriculture. "If farmers don't use fertiliser on their product they can expect to see yields fall by around 30 per cent," says Mr Lee.

About 4 per cent of the fund is invested in Yara International, Europe's largest fertiliser business, which is based in Norway.

Lindsay Manufacturing, a Nebraska-based manufacturer of irrigation systems, is another bet, with 4 per cent of the fund invested in the company.

Traditional irrigation systems are inefficient because they waste a third of the water they spray on fields and crops. If farmers update to one of the modern irrigation systems, they will produce 20-30 per cent more crops, according to Mr Lee.

Poor bets include an investment last year in Auriga, a poor-performing agricultural-chemical group which reported margins well below those of its peers.

Falling sales of two chemicals - flutriafol and malathion, which are used heavily in cotton planting - were largely to blame for the group's poor showing. A surge in the price of corn persuaded many farmers to plant corn over cotton, and this had an effect on Auriga's bottom line.

But Mr Lee remains invested, as the stock has recouped much of its value as the price of glyphosate, the common-crop protection chemical which is Auriga's leading product, has risen sharply on the back of the agricultural boom.

Mr Lee expects volatility to continue in the coming months, given the fluctuations in the price of commodities.

"If countries suffer from drought or famines and start to fight for supply, this will send prices sky-high," he predicts.

The fund opened in June 2007 and has almost £85m in assets under management. Top holdings include Lindsay, Potash, Archer Daniels Midland, Syngenta, Yara and Monsanto. A minimum investment of £5,000 is required.