Dateline: Invercargill, New Zealand
The fundamentals for investing in agriculture are becoming more and more compelling as the days tick by. The world needs to double its food production to feed the massive projected population growth that will occur by 2050, all on a diminishing land base.
The driving fundamentals include:
- Urbanization. The destruction of fertile farmland for real estate developments
- Growing Population. The planet will have 9 billion people by 2050
- Climate Change. Increasingly erratic weather patterns causing droughts and water shortages
- Emerging Markets Middle Class. The growing middle class in the emerging world is demanding more meat protein
- Maximum Fertilizer Efficiency. Yields are maxed out using current fertilizers
- Pesticide/Herbicide Resistance. Insects/weeds are becoming immune to poisons
- Water Scarcity. Aquifers are being depleted at an ever-increasing rate. Water sources are becoming increasingly polluted and require costly water treatment solutions
Compared to junior miners or tech stocks, agriculture may seem hard to get involved in. How do you take a bite of the food pie without becoming a farmer or buying land? Let’s examine three ways to invest in agriculture:
1. Buy ETF’s Exposed To Futures
One example is the PowerShares DB Agriculture Fund (DBA). It seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return plus the interest income from the Fund’s holdings of US Treasury securities less the Fund’s expenses.
The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The ETF tracks the following futures or commodities: Corn, Live Cattle, Soybeans, Sugar, Cocoa, Lean Hogs, Wheat, Cattle and Cotton.
2. Buy Futures
Soy, Wheat, Corn, Orange Juice, Sugar…… the list goes on. This option may be best used by those who are familiar with the agricultural cycles.
3. Buy Stock Tracking ETF’s
The Market Vectors Agribusiness ETF (MOO) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Global Agribusiness Index.
The Index is intended to track the overall performance of companies involved in agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and farm machinery and/or agricultural products (including grain, tobacco, meat, poultry, and sugar), aquaculture and fishing, livestock, plantations, and trading of agricultural products.
4. Buy Individual Stocks
This strategy, along with buying individual futures is aimed at experienced investors or those who subscribe to agricultural investment newsletters. Agricultural stocks cover everything from fertilizer mines to water pump distributors so there is no shortage of companies to own shares in.
One example would be Potash Corp Saskatchewan (POT). PotashCorp is the world’s largest fertilizer company by production. They supply approximately 1/5th of global capacity through their Canadian operations. The company is trading at less than half its 2008 high of near $80.
5. Invest Directly
Of course, you can also make direct investments in agriculture. I’ll be sharing more on that in the coming weeks and months.
Legendary investors like Jim Rogers are incredibly bullish on agriculture. Jim often says that soon it will be the farmers driving the Lamborghini’s. Having exposure to the sector, along with other contrarian investments like precious metals and uranium can help you partake in the explosive gains that occur when the market turns.
Don’t let the Federal Reserve inflate your capital away. Don’t put your money in the inflated stock-market averages like the Dow. Don’t sit on the sidelines as one of the biggest bull markets driven by explosive fundamentals passes you by.
Investors looking for startup opportunities should keep one continent in mind: Africa.
Whilst Sub-Saharan Africa is currently leading the way in terms of undernourishment, the majority of future population growth will not be happening in Asia as it has in the past century, but on the African continent.
This presents a tremendous opportunity for investors to profit from companies that will provide inputs to fuel the agricultural boom. Presently, the major constraint on African agriculture is the inability to secure financing to purchase fertilizer.
By backing African fertilizer producers and participating in the financing of farms in Africa, it is possible to take part in the boom that will occur on the continent, without purchasing land.
For those who are interested in purchasing agricultural land, the prices as many of you would have known, have skyrocketed over recent years. The Gulf states started investing heavily in 2008 in African agriculture as they have to import 80-90% of their food.
As a consequence of this buying, prices have risen substantially and governments on the continent are raising barriers to foreign ownership. Leasing land will become more and more prevalent as the cries of nationalism turn the people against foreign ownership.
Africa currently holds 60% of the world’s unused arable land. This land will be put into production with more of a focus on feeding the domestic market. The middle class on the continent is now hovering around 300 million people.
As they increase their wealth, they will be demanding more meat protein, a common trend that arises as affluence increases.
The World Bank estimates that Africa could more than triple its output if governments were to simplify foreign investment rules and radically re-think their approach to regulation.
This, coupled with the fact that the continent as a whole uses less than 2% of its renewable water resources makes it the standout choice for the next food boom.
Another opportunity that exists for entrepreneurs is storage of produce. African farmers typically lose about 20% of their post-production crop due to poor storage conditions.
Political risk is inherent in Africa so careful analysis must be conducted to determine if projects are viable. Religious fundamentalism has spread with the formation of groups such as Boko Haram.
This may be a deterrent to many investors, but this risk is less than the risk that people face investing in western countries.
African governments understand that they cannot tax or nationalize themselves into prosperity, a far cry from most western governments.
Most nationalization occurs after the project is completed and making a decent return, so entrepreneurs have relatively little political risk during the development phase.
The case for investing in Agriculture has never been stronger. Whilst the price of commodities may fall in the short term, the longer-term fundamentals dictate that prices must rise.
