Agribusiness investors to reap big rewards

A DWS Investments – the global retail asset management business of Deutsche Bank – study found that contrary to popular belief, the result of the agricultural boom is secular, not cyclical, meaning that current high prices are set to continue.

Global agricultural markets have been growing steadily since 2001 and accelerated in 2007 with prices for food, agricultural commodities, farmland and related products and services all increasing. The surge in agricultural prices in 2007 alone contributed to a 20 per cent increase in global food prices for the year, according to the World Bank.

In the Middle East, DWS Investments offers investors the DWS Global Agribusiness Fund that seeks to invest in all parts of the food production-to-consumption value chain via stakes in listed companies worldwide.

Bill Barbour, Investment Specialist at DWS, said: “The forces behind the acceleration in food and agricultural prices are tenacious and are likely to transcend the financial constrictions afflicting the major economies, especially over the long term.”

The report said that five factors – global economic expansion, explosive population growth, surge in income, shortage of land and water and biofuels – will drive growth over the long-term. The high global growth rates of recent years has led to subsequent increases in incomes and food demands of huge developing-world populations. The speed at which this has taken place has exerted exceptional pressure on the world’s supplies of land, water, raw materials, energy and food.

The report stated that competition for land for both agricultural and non-agricultural purposes is intensifying as a result of swift increases in the world’s total population growth and urbanisation.

 

With employment and income prospects brighter in cities, the world’s rate of urbanisation is running faster than total population growth.

Cities are historically built around agricultural land and bodies of water to facilitate trade. As more people migrate to cities, the most fertile soils tend to be utilised first for construction and housing, jeopardising the availability of land for farming. Income is also linked to population growth.

Regions where income growth is the highest such as Africa, Asia and Latin America, are also those where population growth is the strongest. The inevitable consequence of rising incomes in developing nations is increased consumption of higher-cost foods such as meat and dairy products, and away from cereals.

Deteriorating land quality and increasing water shortages are substantial hurdles to increasing future output of agricultural commodities.

The fast pace of industrialisation in both countries means farmers are facing fierce competitive pressure from industries for land and water resources.

With developed nations racing to expand the use and production of biofuels, upward pressure on the prices of food crops from this factor is expected to intensify.

Commenting on agricultural commodities, the report says that the cereals, rice, oilseeds, vegetable oils, sugar, meat and dairy sectors will offer potential returns for investors as all are experiencing persistent growth.

According to DWS Investments, exposure to agricultural themes may provide investors with the benefit of returns which are not closely correlated with those of traditional asset classes such as equities and bonds.

Investors should seek to gain general exposure to the bullish theme in agriculture and a prudent way to achieve this is through investment in a well diversified global fund with a long-term focus.

“The opportunities are clearly long-term. The lasting nature of the influential factors suggests that the trends playing out in agriculture are still in their infancy and thus there appears to be solid potential for further gains,” said Barbour.