But have you ever considered the growing opportunities in global farming? Over the past few years, a number of funds have emerged from investment companies who have seen agriculture as a potential goldmine, kick-starting an incredibly profitable industry.
However, it is still overlooked as many see it as a niche investment, despite the enormous potential it offers. Investors seeking to diversify investments should be interested in the attractive fundamentals and prospective returns available in this space and therefore the diversification it can bring to a portfolio.
The fundamentals
Arable land per capita is shrinking as the world’s population increases – it is predicted the global population is set to double by 2050. Recently the price of food has soared (termed ‘agflation’), due to poor weather conditions, increasing demand from emerging markets and heightened popularity of crop-based bio-fuels. With this in mind, people have started to question if it is ethical to profit from agriculture.
One way to avoid this ethical debate is to invest money into equipment and fertiliser companies. This should lower costs and consequently improve production and lower food prices. In order to satisfy anticipated demand in the agri sector – there is set to be a 50% increase in demand by 2030 and 70% by 2050 – it is vital it receives the capital investment it needs, particularly for food production.
Investable sub-sectors
As such, it is possible to invest in various different sub-sectors within the agriculture industry, from the suppliers of the machinery and tools needed to cultivate farmland, through to the logistics and packing of goods. Both private investors and investment firms are now looking for more innovative ways to make greater returns from the sector, with many starting to take advantage of the huge undervaluation of global farm land production.
Surprisingly, the actual process of farming is the least capitalised agri subsector (0.2% market cap), despite accounting for 22% of the global agri value chain. The most capitalised subsector is that of suppliers (39.6%) closely followed by packing and distribution (36.8%).
Farming is now able to benefit from higher soft commodity prices, rising agri land values and lower production costs and can be broken down into its own sub-sectors, from meat production down to fruit and grains.
There are various methods of investing in farming, whether through buying the land/farm itself or by investing in stocks, ETFs, funds and using tailored indices to monitor the top performing companies in the agri sector. These indices should give investors access to global commercial farming companies which offer liquidity, robust business models, strong growth with low valuations and exposure to agri land. To provide an ethical and balanced offering, they should also consider such issues as food vs. fuel and sustainable and responsible development.
There are a number of influencing factors that should be considered when investing in farming. These include structural and demographic growth trends, (especially in emerging markets), improvements in inputs, fertilisers and application methods, vertical integration of large farming companies and agri land price appreciation.
This is an exciting and key time to invest in farming. While this is currently the subsector with the most opportunities, it is vital to keep a close eye on the different subsectors in the agri value chain to see where the best opportunity lies.
