One of the key trends in the coming decades is the growth in world population, which is predicted to increase from nearly 7 billion today to around 9.5 billion in 2050. With an extra 2.5 billion mouths to feed there will be unprecedented demand for agricultural produce from grains, such as rice and wheat, to livestock and cattle. Against this backdrop the case for agricultural investing is becoming stronger by the day, so a fund like the Eclectica Agriculture Fund, managed by George Lee, could be a valuable addition to your portfolio.
The fund is truly focussed on the theme, aiming to directly benefit from rising crop prices by investing in areas such as food production, farm machinery, irrigation and crop protection, as well as agricultural infrastructure. These areas are even more compelling given that agricultural investing has been out of favour for 30 years, during which time agricultural (or "soft") commodity prices have generally trended sideways. When adjusted for inflation the statistics are staggering. In real terms, agricultural prices have lost 70-80 per cent of their value, making many grains such as corn comparatively cheap, and this is precisely where investors can capture an opportunity.
In an environment where credit is easily available and the western world has been bingeing on debt, farmers have been doing the opposite and deleveraging. At the same time, grain inventories have fallen to 30 year lows and there is now a need for restocking if supply is to meet demand, something that has not been helped by a poor harvest in 2009. In fact, there may soon be shortages of certain agricultural produce such as corn. In 2009 the world produced 798 million tonnes of corn, but consumption rose to 810 million tonnes. Not only do farmers have to make up the shortfall of 12 million tonnes, but they need to produce a further 20 million tonnes just to keep pace with growing demand. In other words, supply of corn has to grow by 4 per cent this year and beyond just to keep up, so there is a danger that shortages will push prices up.
As the pressure on crop prices increases, so does demand for products like fertiliser, agricultural chemicals and machinery, so these are some of the areas where investors might stand to benefit from rising prices. The use of these items is not optional; farmers must keep buying them in order to maintain productivity. According to George Lee, farmers have generally been cautious about making these capital investments in recent years and he anticipates a catch up in demand over the course of 2010, so many agricultural companies have the opportunity to grow their earnings strongly. Indeed, many developing countries like China are also offering heavy subsidies to encourage investment. A further growing demand for soft commodities comes from the use of biofuels as an alternative to traditional sources of fuel and, according to George Lee, 13 per cent of global corn supply goes into ethanol production in the US.
There are approximately 500 agriculture related stocks available to the fund. It is a fairly diverse sector and the largest areas of focus for George Lee are crop nutrition, infrastructure and machinery. The fund is also geographically well spread with US firms making up 32 per cent of the portfolio and the remainder spread mostly across Asia, South America and Canada.
There is very little we can do about global demand for soft commodities trending higher. World population will continue to grow and changes in diets in emerging markets will place an additional strain on supply. Temporary shocks such as extreme weather conditions may also hamper productivity at times. To meet these challenges, there is likely to be significant investment in agriculture across the globe. Given the specialist nature of this fund it is a high risk investment, and will be prone to volatility. However, in my view it offers exposure to an area of the market with exciting long- term growth prospects.