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The recent rally in agricultural commodity markets, which has seen grain prices jump by 45.3% between 1 June and 30 August, serves as a stark reminder of the long-term global food supply/demand imbalance. For investors, however, the greatest opportunities could lie among agricultural solution providers, so-called agribusiness, according to Allianz Global Investors.
This summer’s North American drought, the worst drought since the 1950s, has decimated fields across the US Farm Belt forcing the US Department of Agriculture (USDA) to slash corn and soybean yield estimates.
Supply challenges extend to other grains in other regions, with both Russia and Australia – two significant exporters of wheat – facing unusually dry weather. Some analysts expect Russian and Australian wheat production to experience year-over-year declines of 27% and 20% respectively.
Bryan Agbabian, manager of the Allianz Global Agricultural Trends Fund, an actively managed fund, says: “While weather this summer provided the spark behind the recent rally, a decade of steadily tightening supply/demand balance provided the tinder. Despite ten years of growing global grain production, the growth in supplies has failed to keep up with even stronger global demand growth, particularly out of the emerging markets. Looking ahead, we expect the growth of the emerging market middle class will place increasing pressure on farmers to increase the productivity of the world’s limited arable land.”
iShares S&P Commodity Producers Agribusiness ETF
– Tracks the S&P Commodity Producers Agribusiness
– Diversified portfolio with approximately 70 holdings
– Fully replicated and physically backed, with full
– UCITS compliant, London listed, UK Reporting
In July, the UN’s Food and Agriculture Organization (FAO) announced a 6% jump in global food prices, drawing much needed attention to the challenges facing the world’s food supply and the precarious state of the world’s poorest populations.
The FAO believes that meeting the projected 2050 food demand will require growing food production by 70%. To meet these production goals, FAO estimates that the world needs to make investments of $83bn a year. Specifically, they state that $20bn should be invested in crop production, $13bn in livestock production, and $50bn in downstream services like processing and distribution.
As long-term investors in the agricultural sector, Allianz’s Agbabian believes that the greatest opportunities lie in the agribusiness sector, rather than making direct investments in agricultural commodity markets.
He says: “We think history is bound to repeat itself, with high grain prices inducing farmers to invest in productivity-enhancing inputs that will allow them to grow more food on their limited acreage. Though these supply responses will likely pressure grain prices hurting agricultural commodity returns, we expect the providers of the inputs that helped make farmers more efficient will be key beneficiaries, alongside consumers who will experience a much needed respite from food price inflation.”
Performance data suggests Agbabian and his team at Allianz are on to something. While agribusiness indices recently have lagged the blistering performance of more volatile agricultural commodity markets, the returns have been steadily positive. The BNP Paribas Global Agribusiness Index, for instance, has returned 13.2% year-to-date, while the S&P Commodity Producers Agribusiness Index has gained 12.8%.
Moreover, the robust performance of agribusiness indices hasn’t just been this year. The GAIA Farming Index, an index which invests in listed companies that mainly operate farms, has posted a return of 18.4% over the past four years – a period that includes much of the global financial crisis. The BNP Paribas Global Agribusiness Index has added a healthy 28.2%.
Alan Price, sales director of Indxis, the index’s calculation agent, which was recently acquired by the Nasdaq OMX Group, says: “The GAIA Farming Index shows investment into farm production, a traditionally under-invested sector, can not only generate much needed income for investors but allow companies to increase farm productivity, which is increasingly vital as food production fails to keep pace with population growth.”
Investors looking to access the agribusiness sector, which undoubtedly offers opportunity over the longer term, have a wealth of exchange-traded funds (ETFs) to consider, with iShares, Invesco PowerShares, ETF Securities, Market Vectors, EasyETF and IndexIQ all offering compelling products.
iShares S&P Commodity Producers Agribusiness ETF (SPAG)
Tracks the S&P Commodity Producers Agribusiness Index, a free float market-capitalisation-weighted index offering exposure to approximately 70 of largest publicly-traded companies involved in the agriculture business from around the world. London Stock Exchange (LSE). TER 0.55%.
ETFX S-Net ITG Global Agri Business ETF (AGRP)
Tracks the S-Net ITG Global Agriculture Index, an index comprising approximately 30 global companies that are principally engaged in four primary agricultural sectors: a) Seeds, Chemicals and Fertilizers, b) Equipment and Irrigation, c) Commodity Agricultural Products and d) Livestock Producers. LSE. TER 0.65%.
PowerShares Global Agriculture NASDAQ OMX ETF (PSGA)
Tracks the NASDAQ OMX Global Agriculture Index, a modified market-capitalisation-weighted index comprised of approximately 50 of the largest and most liquid companies engaged in agriculture and farming-related activities that are listed globally. LSE. TER 0.75%.
EasyETF BNP Paribas Global Agribusiness ETF (UAG)
Euronext Paris. TER 0.53%
Market Vectors Agribusiness ETF (MOO)
NYSE Arca. TER 0.53%
iShares MSCI Global Agriculture Producers ETF (VEGI)
NYSE Arca. TER 0.39%
iShares Global Agriculture Index ETF (COW)
Toronto Stock Exchange. TER 0.73%
PowerShares Global Agriculture Portfolio ETF (PAGG)
Nasdaq. TER 0.75%
IndexIQ Global Agribusiness Small Cap ETF (CROP)
NYSE Arca. TER 0.75%