Food is the megatrend of the future and investing in meat, pork, health foods and grains is making investors money
Doom-mongers often talk of the impending explosion in the human population. There will be 9bn people on the planet by 2050, and one of the big problems will be how to feed so many mouths.
“Global supply and demand is out of balance, and in a state of flux,” says Hugo Rogers of the Liontrust GF Global Water and Agriculture fund.
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As global populations are rising, wealth in key hotspots is rising too. In China, Asia and Latin America, in particular, people are developing more sophisticated eating habits than their parents’ generation. It’s not just confined to the affluent elite. Demand for better food has trickled down all strata of society.
“With more money to spend, consumers are shifting from subsistence to diets rich in meat and processed foods,” says Henry Boucher of the Sarasin Food & Agriculture Opportunities fund.
Even small changes in income can mean people have money left over for edible treats.
Indonesia’s most popular chocolate bar, Top Chocolate, costs five US cents but only 30m people in a country of 240m can afford it. “A small improvement in people’s incomes would have a dramatic effect on the sales of products like this,” Boucher says, adding the market for Top Chocolate could double within five years.
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“We’ve seen pork prices rise in China recently, after low prices for a long time meant that local pork producers went out of business,” says Darius McDermott of Chelsea Financial Services.” China consumes about half of global pork and is set to now become the world’s largest importer, taking the top spot from Japan.
There’s also growing demand for fresh fruit and vegetables, dairy, spices, wine and restaurant meals.
Changing tastes are not just confined to developing countries. Consumers in the West are increasingly focused on low calorie, high nutrient, organic and natural foods.
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“In developed markets the important trends are a shift away from sugary and salty processed foods towards healthier and fresher food with more protein and vegetables,” says George Lee of the CF Eclectica Agriculture fund.
“The world faces great structural difficulties in meeting this growing demand given shortages of arable land and water globally. There needs to be continued investment in agricultural productivity and the infrastructure behind the global supply chain, and any shortfall in this investment will quickly lead to higher food prices.”
There are shortages because the western diet is resource-intensive. It means pressure on land, water and the environment, explains Gertjan van der Geer of the Pictet Agriculture fund. A single kilogram of pork requires 4kg of grain to produce it, for example. Arable land will have to be more productive – although it will have to be done with less water and fewer chemicals.
Every part of agriculture from field to fork is becoming smarter to accommodate these changes. Investment funds are backing everything from Asian dairy producers capitalising on the newfound popularity of milk in the region, to companies managing food waste. They’re investing in fish farming, fertilizers, land, forestry and super-seeds which make plants yield more.
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There are funds which invest specifically in “soft” commodities such as wheat, sugar or pork. But the price of these goods (and thus the performance of these funds) is often driven by factors which are difficult to forecast, such as the El Nino weather pattern in Latin America or drought in India. It’s a highly specialised sector, and best suited to investors with a high risk appetite.
“Commodity funds might be great when grain prices are rising as they typically have high weightings in the major crops of corn, wheat and soybeans, but they have little opportunity to diversify this risk,” says Lee.
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The commodity sector has been going through a downturn, with the price of everything from oil to sugar depressed. That has had an impact on other areas of the agriculture sector. But funds which take a wider view of the sector, investing in established businesses in different parts of the supply chain, are less reliant on the price of a single foodstuff.
McDermott likes the Baring Global Agriculture fund and First State Global Agribusiness fund. Both pick companies from around the world and have long track records. “It’s a long-term trend which sees lots of waxing and waning in popularity,” he says. Given the slow changes underway, performance of these funds ought to be judged on a five to ten-year timescale at least.