Global agricultural markets and their supporting industries highlighted as prospect for investors

Written by Ray Clancy

Monday, 26 July 2010 09:31

Harvesting returns from equities are set to benefit from dynamic shifts in the future of the global agriculture markets, it is claimed.

The broad agriculture sector and its supporting industries are set for long term growth due to a growing world population, rising prosperity, increased demand for biofuels and constrained supply, according to the managers of BlackRock’s BGF World Agriculture Fund, which has now been launched in the UK.

It is an opportunity for investors to gain exposure to the sector, according to Desmond Cheung and Richard Davis, both members of BlackRock’s Natural Resources Team which manages $33.8 billion across the agriculture, energy, new energy, and metals and mining sectors.

They point out that by 2050 there will be an estimated 9.2 billion people in the world, compared to 6.9 billion today and food production will have to rise by 70% above 2005/07 levels to feed them.

Also incomes are rising in many developing countries, particularly in Asia and as people become more affluent dietary patterns change and demand for meat increases. However feeding animals is less efficient than using crops to feed people directly as it takes over 8kg of grain to produce just 1kg of beef. As a result, rising demand for meat from developing countries requires exponential growth of grain output for livestock production, they point out.

Governments around the world are encouraging a switch to biofuels. The world will produce an estimated 200 million tons of biofuels, doubling the 2009 level, fuelling demand for sugar, corn, soybean and oilseed rape, etc, from which bio fuel is produced, as well as for land to grow these crops on.

Global crop production has experienced powerful growth over recent decades. But this rise has not led to a build up in grain stocks. Since the extensive adoption of farming technology over the past decade, the improvement in crop yields has slowed. The world has 1.4 billion hectares of agricultural land. Whilst there is potential to increase this by another 1.6 billion hectares, this requires substantial investment of capital and time.

‘These emerging global trends will structurally change the agriculture market in coming years. We believe that the BGF World Agriculture Fund offers a highly effective way to access this structural shift,’ said Cheung, co-manager of the BGF World Agriculture Fund.

‘Agricultural equities deliver great flexibility to profit from opportunities in key sub sectors of the wider agriculture industry. These sub sectors have different drivers and can behave differently at various stages of the cycle. For example, as soft commodity prices rise, farming becomes more profitable and farmers can invest in better technology such as equipment, chemicals and seeds to raise productivity,’ he explained.

‘If crop prices fall food manufacturers, livestock and biofuels producers enjoy lower costs. Moreover when selected on a global basis, we can diversify our Fund in terms of geographical risks from events, ranging from weather, and political turmoil to economic and trade restrictions,’ he added.

Co manager Richard Davis said the fund has the flexibility to invest in companies that provide services to the farming sector and those that are engaged directly in the production of grains and soft commodities. ‘We scan the sector for the most promising stocks that could benefit in different grain price environments from seeds, chemicals and equipment suppliers to farming and plantation companies. The Fund is currently weighted towards the agribusiness sector, edible oil and fertilizer sub-sectors,’ he said.