An Appetite For More

The outlook for agricultural product prices globally appears to be quite positive. Data released in January 2011 by the United Nation's Food and Agriculture Organisation (FAO) confirmed that the world is facing a "food price shock". The FAO food price index surged to a record high and surpassed the previous peak of June 2008. Steep global food and commodity prices have resulted in unexpectedly high inflation in China and kept India's inflation above its central bank's target range. Even developed countries are facing inflation concerns as soft commodity prices have surged since 1 July 2010.

Elevated food prices result from extraordinarily strong structural forces. Asia's populations are earning and consuming more and their tastes are changing rapidly. Asia's domestic output will not keep pace with its growth in demand. The world needs a strong supply response to satisfy the growing demands for food; but the supply side cannot make swift adjustments.

The drivers behind worsening food shortages are worth revisiting. Relentless population growth is a key factor with the bulk of growth expected to occur in China, India and other emerging nations. Living standards in these countries are rising rapidly, powering demand for higher-quality, protein-rich food that requires escalating amounts of food grain, land and water to produce. The challenge is particularly difficult given the world's shrinking supply of arable land, increasing environmental concerns and water constraints. With continued growth in world GDP and world population, increasing food demand will only rise. Since the global grain inventories are already low, any supply disruptions will require immediate solutions that will be provided most likely by the private sector.

The crop outlook looks negative with pressure on crop yields in the southern hemisphere through weather-related events in Argentina, Brazil, Uruguay, Paraguay and, most recently, floods in Australia. We still have to assess the impact of a very harsh winter in western Europe, Canada and the US for planting in the northern hemisphere. Our early suspicion is that we should continue to have a slight negative impact for crop yields. Unless we see a massive sign of demand destruction, which is most unlikely, inventories will not be replenished this year.

It is unlikely we will have positive news flow over the coming months to strengthen food supply. Unless we see price elasticity kicking in from declining demand, we should see a stable to slightly upward soft crop price environment. We should also keep in mind that the closer we get to zero inventories, the higher will be the price increments and volatility. 

The FAO calculates that in order to meet the future food requirements globally, we need extra investments of at least $60 billion per year in addition to the $125 billion currently invested (right across the value chain). At current yields and wastage levels, we will require an extra 750 million hectares in 35 years to feed the world. Land alone will not change the equation as this land really does not exist — we cannot afford to destroy lowland temperate and rain forests because of climate change.

The challenge and solution is to increase the yield from existing land in a sustainable way, and the private sector can help. This includes companies that offer better seed technology, safer and improved pesticides and fertilisers, or companies that can help with irrigation and reduce water waste. These are all likely to be in demand, increase profitability and rise in value. The future also looks bright for farmers and agriculture as well as companies across the agribusiness supply chain.

For Indian investors, direct exposure to agricultural companies through the capital market is difficult. Only a tiny part of the Indian stock exchange relates to agribusiness companies as most of India's agriculture is unlisted or is in a co-operative structure. For retail investors the best way is to take advantage by investing through mutual funds that offer an agribusiness fund, investing in both developed and emerging markets. However, while investing, investors should consider that agribusiness investment is not merely focusing on soft commodities and agricultural products; so, they should also invest in listed companies across the entire agribusiness supply chain, right from seed to the consumer's plate. 

The author is director, investment specialist Asia-Pacific and MENA, Deutsche Asset Management

 
(This story was published in Businessworld Issue Dated 28-03-2011)