Food for thought
It is true that what and how you eat can change the planet.
30 years ago Ralf Oberbannscheidt's mother told him to finish everything on his plate because outside there were people starving in the world.
Oberbannscheidt is now the managing director and head of agribusiness at Deutsche Asset Management and co-founded the global agribusiness strategy for the bank in 2006.
'It was only true in theory but not in reality because it made no difference to the world whether I finished my food or not. But (what) is true for today's world (is) we are linked in global trade. A farmer in Kenya would have a mobile phone and know the global prices of wheat.'
Investors have long heard the emerging markets story where an increase in income leads to higher protein consumption, and eventually leads to an increase in demand for grains because it takes several kg of grains to produce one kg of animal protein. However, Ralf said the 'soft regulations' in different countries on food consumption patterns should not be overlooked.
For example, in the U.S., the recent revision of its food chart could, like its tax policy on soft drinks, lead to changes in global agribusiness. Now based in New York, Oberbannscheidt joked that if Americans suddenly decided not to eat so much beef, it would have a huge impact on global crop prices because it takes 10 kg of grains to produce 1 kg of beef.
Investors who are eyeing emerging markets could expect the same kind of health-conscious regulations to take place too, as animal protein and processed food consumption climbs up steadily.
'There is no government intervention in food processing yet in the emerging markets,' he said. 'But when people there move from a grain-based diet to a high-protein diet, investors need to consider these possible changes in consumer patterns induced by government policies. These are always good investment opportunities - some companies will do well, and some will have to leave the game.'
When it comes to picking stocks, Ralf said investors should focus on the long-term solutions to the supply and demand dynamics, instead of the fluctuating soft commodity prices. Agriculture investment is a different category compared with other natural resources, like mines and energy, because the growing demand for food is unlikely to reverse even in times of major economic crisis. 'People may eat cheaper food, but they will not eat less,' Ralf said.
When it comes to stock picking, Ralf said some of the sub-sectors in the upstream, like logistics and infrastructure, are dominated by a few international companies because of the size of capital involved. However, when it comes to food processing, there are mid-cap and small-cap companies involved, and domestic companies could be a good investment option. In fact, he prefers investing in local companies instead of global companies which are branching out to emerging markets because they usually provide 'better, cheaper and healthier food products', and have better local understanding.
Solid, field work is important, and one should always look for details when you invest in agribusiness - is the farm well-run? Are the irrigation systems working? How old are the water pipes - five years or 10 years old? Agribusiness is a young sector which has been ignored by investors for 40 years, Ralf said, and the management quality could vary greatly from one company to another. It could be a warning sign if a company is delaying its response to fluctuating soft commodity prices, because it could be manipulating the price and trade volume of its products in order to look good on the books. Such companies are to be avoided.
Whether the company is involved in food export is also a good indicator. For example, if one is looking at a vegetable processing company in China, it would help if it is exporting to Japan, which has one of the highest standards on food imports in the world. Ralf also noted that corporate governance is another key factor, because any breach on human rights and labour rights, and any breach on land registry and transaction could eventually translate into a financial problem with the company.
Desmond Cheung, a London-based director and portfolio manager for BlackRock's World Agriculture Fund, also eyed domestic companies in China's agribusiness. His fund now encompasses about 70 stocks, which included small and mid-cap holdings in China and Asia. BlackRock Global Investor, managing US$3.56 trillion worth of assets, is the largest fund management group in the world.
In China, Cheung favoured the niche markets which were relatively free from government intervention on food prices. Value-added farm products, such as organic farming and premium vegetable and fruit production were on the rise as the growing urban population demanded better food quality and safety, he observed.
Other emerging investment opportunities included farm operators and forestry operators in South America and Eastern Europe which could benefit from the rising value of crops and the improvement in productivity.
Cheung also looked at global companies which could provide logistics and infrastructure solutions to reduce transportation costs of agricultural products in regional and global trade. According to the statistics from the United Nations, the world could potentially expand its cropland of 1.5 billion hectares by 445 million hectares, but 41 per cent of potential land lacked proper logistics and was over six hours transport time away from a major market.
The average investment period in an agriculture fund tends to last from three to five years, Cheung said. Asked whether grain price fluctuations and inflation rates could affect investment return, he said grain price was not the focus in agribusiness investment. According to US Census Bureau statistics in 2009, the global population is projected to reach 9 billion by 2050, and food production needs to rise by more than 40 per cent by 2030, and more than 70 per cent by 2050 to cope with rising food demand. It is also estimated that if the whole population of China switches to the meat consumption pattern of South Korea without increasing the size of population, it will immediately need 27.4 per cent more meat and fish, and 18.1 per cent more diary products per year, outpacing the global average growth rates of 9.2 per cent and 1.1 per cent..
'We invest in solutions to food productivity in the longer term, not on the commodities,' Cheung said. 'Short-term co-relation between equities and commodities can be high, particularly in the farm inputs sub sectors like fertiliser, agricultural science, and equipment. But over the long term, equities have the potential to outperform because they create value.'