The Analyst: An appetite for global food stocks

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The Independent Online

Do you fancy a Chicken Maharaja Mac? Well they do in India. Sales growth for MacDonald's Indian enterprises is 35 per cent per annum with 157 restaurants open now. Management have said they will more than double this in the next five years. This prospect may fill some of you with horror, but it is just one example of a much larger trend: the urbanisation of the developing world.

This is a highly promising investment theme that I have mentioned often in the past. There are many way to access it, including several specialist avenues. One of the most interesting is food – not just meats and grains but the whole supply chain "from field to fork", as the manager of the Sarasin AgriSar Fund likes to say.

For 30 years, up to 2006, the global agriculture industry appeared to be moribund. Persistently volatile prices for food caused by weather, disease and currency were a big part of the problem. This hasn't gone away, but a combination of other factors means the sector looks much more attractive today.

Strong demand growth for agricultural products has been driven by an increasing population, changing diets in developing nations and biofuels. This hit at a time of slowing productivity, with limited supply coming from our finite supply of well-irrigated and fertile land. The world population hasn't stopped growing (by 2050 there will be another 2.5 billion mouths to feed), so we will continue to need more food. More interestingly, emerging markets are radically changing their dietary habits, and this is an area that the Sarasin AgriSar Fund is well-placed to benefit from.

In the cities, particularly in places like India and China, modern supermarkets are becoming more popular as incomes increase and people can afford to indulge more; this can be seen particularly in an increase in protein consumption. The demand for more meat naturally creates its own demand for more crops to feed the animals, while also requiring more fertiliser and farm machinery.

An important point to make about the Sarasin AgriSar Fund is that it is not a pure commodities fund. It can have exposure to commoditise, but also spends time looking at other opportunities in the supply chain, for example, transport and retailing. In fact, it is the consumption trends that are the principle focus of the portfolio at present. An example is a Turkish company called Tat Konserve, which processes tomatoes and peppers to make sauces. It has taken over as a major player in this market with the result that more traditional areas such as the Channel Islands and southern Italy have lost out considerably. This is not just a case of lower-cost labour either; they have an extremely hi-tech factory, too.

Plant Health Care is another holding in the fund. They are a world leader in fungal seed treatments, an organic way of dramatically boosting root creation, meaning that plants not only produce a better yield but are more tolerant to drought. Within emerging markets there are interesting companies too, such as Want Want China Holdings. This is the largest maker of rice cakes and flavoured milk in China, with a strong domestic brand and the possibility of spreading its distribution outside.

The universe of stocks available to the Sarasin AgriSar Fund is presently around 500. This number is growing as more of the private companies become listed on stock exchanges around the world. Since the 1950s most of the growth in agricultural products has been from efficiency gains and greater productivity; this must continue if we are to feed all these new people and technologies such as GM will have to play a part.

I think this is a theme that will develop over the next 20 years or so. It is a specialist area, and this fund should be considered volatile and higher risk. However, now that so many more people in the developing world have tasted (literally) the good life, they are not suddenly going to go back. In my view, the Sarasin AgriSar Fund is a fascinating long-term opportunity.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

yourmoney@independent.co.uk

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