Agriculture ETFs: Agribusiness to harvest strong returns over coming decade

Oct 20th, 2011 | By | Category: Commodities

Bullish outlook for agriculture, agribusiness ETFs
Robert Moskow, food and agribusiness analyst at Credit Suisse, has proclaimed this the “golden age” of agriculture, while Jim Rodgers, the commodities investor, told Bloomberg that “farming is going to be one of the great industries of the next 20 years – the farmers are going have the Lamborghinis in the future, not the brokers on Wall Street.”

Agribusiness to harvest strong returns over coming decade

Agribusiness to harvest strong returns over coming decade.

These statements may sound dramatic, but the fundamentals support their claim.

Earlier this year, the UN’s composite Food Price Index hit its highest level since records began. While catastrophic weather has been a consideration, long-term structural factors are predominantly behind the rise.

In the first half of this century, as the world’s population grows to around 9 billion, global demand for food, feed and fibre will nearly double. This will occur at a time when, increasingly, crops are also being used for biofuels.

The population of the world is currently growing at around 1% per year; this translates into an additional 70 million mouths to feed every year – a not insignificant number. Moreover, as the majority of population growth is occurring in the developing world, demand will further be exacerbated by dietary changes, most notably increased meat consumption.

In the US, annual consumption of meat is 130 kilograms per capita, while in Europe it is about 100.  In China it is only 55 kilograms, but it was only 39 kilos a decade ago.  In India it is only 7 kilograms. If China, India and other emerging markets follow a typical development path, we can expect rising affluence in these countries to lead to a surge in demand for meat.

Meat-based diets, however, require vast amounts of grain.  Livestock is reared on grain feed making production heavily resource intensive. Indeed, it takes approximately 7 kilograms of grain to produce just 1 kilogram of meat. As a consequence, global grain demand is set to grow substantially.

But in addition to an inexorable increase in food demand, crop demands for use as biofuels are likely to drive up prices further.  As the US and other countries search for alternative fuel sources, one choice they turn to is grain. In the US, 40% of the corn crop is now used for ethanol. In essence, we are using our sources of food as a means to fuel our economy.

Then there are wildcards such as weather that can greatly affect supply. Recent issues in Australia and the Ukraine have hurt the supply of wheat, pushing the global stocks to multi-decade lows and sent the price soaring as demand continues to surge.

The most efficient way to meet increasing demand is to increase crop yields. This can be achieved by using fertilisers and modern farming technology – the demand for both will grow strongly over the next decade.

It is clear the investment case for agriculture is compelling. To play this theme there are a range of exchange-traded products available, including:

PowerShares Global Agriculture Fund from Invesco PowerShares

EasyETF BNP Paribas Global Agribusiness from EasyETF

ETFS Agriculture £ DJ-UBSCI from ETF Securities

ETFX S-Net ITG Global Agri Business Fund from ETF Securities

iShares S&P Commodity Producers Agribusiness from BlackRock iShares

UBS-CMCI Agriculture ETF from UBS

S&P GSCI Agriculture Total Return Treasury Bill Secured Source ETC from Source

iPath Dow Jones-UBS Agriculture Subindex Total Return ETN from Barclays Capital

db Agriculture Booster ETC from Deutsche Bank

RBS Market Access RICI Agriculture Index ETF from RBS

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