The Analyst: Food is a commodity too, so tuck in

Continuing stock-market volatility is not encouraging private investors to put their money into the stock markets. However, the market falls in themselves don't necessarily mean that investors should stay in cash. Indeed, if anything you should be searching for the opportunities that appear.

There are always areas of the stock market that will weather the storm better than most, and indeed may even strengthen. In my opinion, one such opportunity could be agricultural commodities. When we talk of commodities, most people imagine oil and metals; crops and foodstuffs have been largely (in my view, wrongly) ignored so far.

Don't make the mistake – as some pundits have done – of thinking of commodities as a "safe haven". They should be considered higher-risk investments, and in the short term there could be some profit-taking. That said, I think this could be a major growth area over the next decade or more.

One investment house that feels the same way is Sarasin; on 31 March it is launching its Agrisar Fund, which will invest in agricultural commodities.

Sarasin may be an unfamiliar name to you, but its parent company is the Dutch bank Rabobank, which focuses on agribusinesses – so there is some expertise in this area.

The story behind agricultural commodities is not dissimilar to that of hard commodities. There has been no significant investment in agriculture, on a global scale, for more than 20 years. This is because there has been relatively low demand and huge pressure to keep prices low. However, the demand picture has suddenly and significantly changed.

As I have often commented in this column, we are witnessing a huge urbanisation trend. The world's population has risen by more than one billion in the past 12 years, and it is likely to do the same in the next 12. Newly prosperous societies are beginning to want the volume and quality of food that we have enjoyed for many years. But, after decades of underinvestment, the world's agricultural industries just aren't set up to cope with this level of demand.

When you throw in the current mania for biofuels, which take land away from food production, you get a "perfect storm" for food prices. We've already seen prices of wheat, soya beans and rapeseed go through the roof. Dairy products are following fast, and meat is likely to be next. This is a global phenomenon – and, I believe, a multi-decade investment opportunity.

So, what can the Sarasin Agrisar Fund invest in? In effect, the entire spectrum of agriculture, from shares of companies benefiting from this trend to the agricultural land itself (via Real Estate Investment Trusts) is available.

Sarasin will also look at themes developing in tandem with the boom in agricultural commodities. These include the security of supply, something we are going to read about a lot more as governments around the world realise that without securing their food supply, they won't remain in power. In addition to this, Sarasin will look at intellectual property and corporate restructuring.

Sarasin believes there are four major certainties. First, the agriculture industry must grow wealthier to pay for the investment that needs to be made. Second, technology is a long-term solution; much agriculture is still manned, not machined. Third, securing supply is a strategic necessity. And four, commodity prices will remain volatile in their scope to move sharply both up and down.

The fund will have a portfolio of approximately 50 to 60 stocks across the whole supply chain within the agricultural theme. This includes fertiliser, pest control and seed inputs, irrigation mechanisation, storage, processing and distribution. This is not an area that has been well researched by the investment community as a whole, so there is plenty of scope for stocks in the sector to be materially undervalued.

The fund can invest in the actual agricultural commodities themselves, but this exposure is expected to be no more than 15 per cent. This is because the real long-term growth story is in the supply chain leading up to production. This is very much a "picks and shovels" approach.

Sarasin, with its long experience in thematic funds and an extremely experienced team under Henry Boucher (who himself has 24 years' experience of managing money) could, in my view, be a good long-term bet.

Finally, let me leave you with the thought that, by 2024, India's population is predicted to be bigger than China's. The pressure for food and water, in particular, will become intense. This is a theme that transcends the economic cycle, as no one can do without food and water.

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

cash@independent.co.uk