Investing in agriculture

I was invited this week to participate in a Natural Resources Forum on Investing in Agriculture at the London Stock Exchange. Topics ranged along the value chain, from investing in farmland through logistics to consumer trends.

One speaker, an expert on farmland investment, gave three warnings to potential investors:

  • All farms are local and local expertise is essential. The quality of the land can vary from one field to another, as too can microclimates in terms of flooding and frost
  • Prolonged periods of bad weather can throw off even the most conservative revenue predictions.
  • The market for farmland is illiquid; it is easier to buy than to sell.

There was an interesting discussion as to whether  farmers would be able to meet the world’s ever increasing demand for calories. Although, as one participant put it, “they aren’t making farmland anymore”, others warned against  “Malthusian” arguments that food production is limited. Agricultural yields continue to increase and the world has plenty of under-used land. Besides, with 40% of the US corn crop and 50% of the Brazilian cane crop going to ethanol production, extra calories could relatively easily be drawn back from fuel to food.

It was my task to speak about agricultural commodity merchandising and I highlighted the sector’s three structural challenges:

  • Trading margins have disappeared as markets have become transparent and information has become instant
  • The growth of algorithmic trading systems have made it more costly to hedge and harder for fundamental traders to predict future price moves
  • Agricultural merchandising companies are in danger of losing their social license to operate

I argued that at this point in the commodity cycle there is an oversupply of food, an over supply of freight and infrastructure, and an oversupply of agricultural merchandising companies. I explained that we are currently seeing consolidation all along the supply chain as some players merge and others exit.

We then discussed the way that market power has shifted along the supply chain from producers to food manufacturers (brands) to retailers to consumers. This shift presents a number of challenges in terms of brand vulnerability, but also some opportunities if you can identify a trend earlier enough.

One trend that we discussed was the way Californians are now adding butter to coffee. Who would have predicted a few years back that butter would make such a come back?

In their Investment Outlook for 2018, Credit Suisse identified ten priorities for the millennial generation. Number three on the list (after education and affordable housing) was what Credit Suisse called “sustainable consumables”. The bank defined them as, “consumables produced in a socially and environmentally responsible way, taking into consideration the entire supply chain of goods”.

Credit Suisse highlighted “Beyond animal agriculture” as a major component of this trend. It wrote,

According to the United Nations and the Food & Agriculture Organization (FAO), raising animals for food is the primary cause of species extinction, oceanic dead zones, Amazon deforestation, and antibiotic resistance. Moreover, it has a greater impact on climate change than the entire transport sector. Our modern system of animal agriculture is one of immense inefficiencies, externalities and vulnerabilities unable to sustain the predicted doubling of meat demand by 2050, according to FAO.

With such measurable risks, two parallel and disruptive technologies have emerged: plant-based food and cellular agriculture. Today, plant-based varieties of virtually all animal products such as meat, cheese, milk, eggs and fish are sold worldwide. Investment opportunities in the private sector are abundant, as business creation in the space is growing, brands are gaining importance and acquisitions by large consumer corporates are increasing.  

Credit Suisse continues,

To end all forms of malnutrition by 2030 was one of the challenges world leaders laid down when they adopted Sustainable Development Goals at the end of 2015. Nearly 800 million people worldwide remain chronically undernourished, and over 2 billion suffer from micronutrient deficiencies, also known as hidden hunger. Another 2 billion are overweight, with 600 million of these being obese. Meanwhile some 150 million children under 5 years of age are stunted, approximately 50 million children from this same age bracket are undernourished, while some 40 million children are obese. The UN initiated the Scaling Up Nutrition (SUN) movement, now counting 60 countries, bringing together governments, civil society, UN bodies, donors, business and scientists. 

Business can contribute and play a significant role in nutrition by addressing food and nutrition across the value chain, providing more affordable, accessible yet sustainable food solutions for many, and we are starting to see initiatives in this direction. Big food companies are already offering products containing important micro nutrients to help combat under-nutrition and deliver on the UN Sustainable Development Goals.

Credit Suisse listed blockchain at number six on its list of key millennial trends, and we are already glimpsing the impact that this technology could have on reducing both risks and costs in the supply chain.

Vertical farming (proximity agriculture) was at number seven on Credit Suisse’s list. The bank defines this as “redeveloping urban space to bring agriculture to cities, using techniques such as growing plants in vertically stacked layers, indoor farming or integrating agriculture into existing structure.”

Bringing this all together, it appears now that there is a clear and increasing convergence of interest between investors, consumers, social welfare and the environment. That’s what you get when you empower consumers!

These issues and others will be discussed at our Commodities Conversations event in London’s Natural History Museum on 6th June 2018. Places are limited so register here.

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