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Investment opportunities in agri-business

31 August 2012

While our August Bank Holiday weekend brought yet more wet and unsettled weather, the story is quite different in the US.

Severe droughts in America are affecting the corn and soya bean crops in the mid-west, sending the prices of these two key commodities sky high, with an element of speculation and profiteering worsening the pain. There are fears that this state of affairs will lead to more hunger in the developing world.

We Brits are not immune to the rise in the price of our basic foodstuffs as a trip to the supermarket will bear out. Last month’s inflation figures pointed to higher food costs caused by a rise in the price of grain and sugar resulting from the poor harvest. Looking beyond the short-terms blips, there is every reason to believe that the cost of staple commodities such as wheat, sugar, dairy and meat products will continue to rise.

This will surely mean ongoing headaches for many at the checkout. While the idea of exploiting hunger by trying to profit from short-term price movement is distasteful, there are investment opportunities in the medium-term in listed UK companies operating in the agricultural sector. The key driver for Britain’s 25 or so agri-business companies reflects the socio-economic change that is seeing the world’s power base relentlessly slide east. Population rise is another obvious factor with the UN’s Food and Agricultural Organisation predicting a 30 per cent increase in global population to £9 billion by 2050.

The counter argument to this is that the expansion in agricultural output is set to outstrip the increase in size of human population, mostly due to better production methods.

However, this fails to take account of the rise of the middle classes in ‘economic powerhouse’ countries.  China, India and Brazil, for example, are now becoming consumers of McDonalds and Kentucky Fried Chicken rather than the traditional rice and veg. And agri-business is not just about foodstuffs: crops are also being cultivated to produce bio-fuels as well as cosmetic and health-care products. This will only add to the upward pressure on prices.

As a result, the world of agriculture is attracting increased interest from investors. Rising soft commodity inflation continues to be a regular news feature and raw material inflation is now often included as an important guidance point in listed company outlook statements. So it comes as no surprise that investors are increasingly attracted to gaining exposure to the potential high market prices and cash flows generated by many of the businesses involved in the agricultural market.

But increased cash flow is only one way of measuring the success or otherwise of companies in the sector. The particular crop grown is important too, as is geography. It is also worth considering the type of company involved in the agri-business sector. While the specialist may have control of the crop from first seed to its eventual sale it is also at the whim of the market. The diversified producer may well be a safer bet, if a little less exciting.

The next step for a potential investor is to assess which of the market-quoted agri-businesses offers the best value. There are a number to choose from.

Palm oil manufacturers are up-and-coming (the market is huge and growing, palm oil being found in everything from chocolate to pizza). Cautious investors may prefer the merits of basic commodities such as sugar. Associated British Foods for example owns British Sugar as well as Primark, therefore is well diversified and solidly profitable.

For specialist advice and guidance on agricultural matters, speak to our agriculture and estates team.

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Adam Hale BA (Hons), TEP, FALA
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