By Bryan Agbabian, manager, Allianz Global Agricultural Trends fund
The current 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.
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 by 26% and 18% respectively over the last four months. 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. While weather this summer provided the spark behind the recent rally, a decade of steadily tightening supply/demand balance provided the tinder. Despite 10 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. In July, the UN’s Food and Agriculture Organisation (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. Though still below the highs seen last year, if grain production does not quickly and dramatically improve, we fear the impact of rapidly rising food costs will threaten the livelihood of the world’s poorest. Though the media attention this summer has focused on the near-term weather disruptions, we continue to keep our eye on the longer term challenge. 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.
While government investment in education, research, and infrastructure is expected to be significant, they believe the private sector will need to provide the lion’s share. Specifically, they believe $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, we believe the greatest opportunities lie in the agricultural solutions providers sector, rather than making direct investments in agricultural commodity markets. We think history is bound to repeat itself – with high grain prices inducing farmers to invest in productivityenhancing 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. The Allianz Global Agricultural Trends fund invests in the shares of companies on a global basis, and is designed to focus especially on two key investment themes: companies benefiting from the increasing and changing production of raw materials; and companies operating in the product processing and distribution industries.
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