Direct investment in agriculture assets on a global scale can provide diversification, inflation protection and return potential and can be a very good choice for your investment portfolio.

Agricultural commodities have three main uses: food, feed and fuel. Demand for each of these uses is increasing, putting pressure on supply to meet this demand. The key drivers of this increase in demand are:

  • Global population growth – increased population results in increased demand for food.
  • Economic growth in emerging markets – increased GDP per capita and urbanisation are resulting in increased demand for meat and dairy products leading to increased demand for livestock feed.
  • Biofuel policies – government policies which set targets for renewable fuels are resulting in the diversion of agricultural output to biofuels.

“In the next 40 years, humans will need to produce more food than they did in the previous 10,000 put together. But with sprawling cities gobbling up arable land, agricultural productivity gains decreasing, and demand for biofuels increasing, supply is not keeping up with demand.”

The Economist

United Nations • Department of Economic and Social Affairs • Population Division

According with this estimates
The world’s agricultural production must increase by substantial amounts to meet demand for food, feed, fuel and fiber. Moreover, the world’s food systems suffer from gross complexity, which results in enormous inefficiencies.

Demand for increased food, feed, fuel and fiber is driven by increased population and an increase in the middle class in emerging economies. Coupled with a shift in dietary preferences from grains and staple carbohydrates to more protein-based diets including pork and beef (and perhaps fish), as well as biofuel production, more grains will be used to feed animals and fuel our automobiles.

As an energy-intensive sector, agriculture is closely linked to energy markets, with crop production and demand potentially adversely affected by higher oil prices, while crop inputs (such as fertiliser) may benefit from lower natural gas prices. These shifting dynamics will affect profit margins in different segments of the agricultural supply chain.

In addition to energy prices, likely constraints to increased productivity of agriculture include climate change, water resources, infrastructure, education and training of producers and social or governmental policies that distort agricultural markets.

Investing in agricultural assets provides a number of benefits to investors. Agricultural assets are real assets, that is, they are tangible assets which provide a hedge against inflation, have low correlations to traditional asset classes and are less impacted by economic slowdowns.

Food and agribusiness form a $5 trillion global industry that is only getting bigger. If current trends continue, by 2050, caloric demand will increase by 70 percent, and crop demand for human consumption and animal feed will increase by at least 100 percent. Meeting this demand won’t be easy: for example, 40 percent of water demand in 2030 is unlikely to be met, and more than 20 percent of arable land is already degraded.

McKinsey

Investment opportunities
New technologies, product platforms and innovative business models in agriculture technology and food systems will drive the shift from a conventional, environmentally harmful and socially detrimental form of industrial agriculture to a more socially just and environmentally sustainable food production and distribution system

The agricultural technology sector is large. In the US alone it comprises over 8,500 companies generating over $1.3 trillion of revenue per year. Moreover, the volume of transactions in the agricultural sector is greater than $15 billion per year, with an estimated peak of over $70 billion in 2007.

Agricultural supply is expected to fall far short of demand over the coming decades, particularly as developing and emerging economies develop further and consumption levels increase. McKinsey, for example, estimates that land supply would have to increase by 250% over the next two decades, compared with the rate at which supply expanded over the past two decades. There is, therefore, vast room for technological development in today’s agricultural sector to boost productivity and efficiency and we expect a transition to “smart” agricultural technologies over the next decade and beyond. Agriculture is a vast and growing sector; as such, it presents massive investment opportunities.

Going into the future, “smart” (and “climate smart”) agriculture will include advanced irrigation and precision technologies, benign environmental residues from chemicals, an efficient distribution and marketing system for producers and a consumer-led demand market for sustainably grown foods.

Reducing waste in the food system presents an investment opportunity with resource productivity savings worth $340 billion globally, per year, by 2030. This opportunity spans from high-income economies where supply chains are more efficient to middle- and low-income economies with less advanced supply chains (such as modern cold storage systems). In high-income economies a majority of the waste is either at the farm – where products are discarded because they do not meet quality specifications or because of over production – or by the end user. In middle- and low-income economies, however, inadequate supply chain infrastructure means that waste is concentrated, from post-harvest to distribution.