Farm input firms benefit from high food prices
London, February 16, 2011
Producers of seed, fertilisers and other agricultural inputs are the beneficiaries of rising food prices as farmers scramble to increase output, a report said.
"Given where soft commodity prices are, farmer economics are more attractive. We expect strong growth in demand for farm inputs and expect to see acreage expansion," said Renzo Casarotto, a co-manager of First State's Global Agribusiness Fund.
Global food prices are at record levels and are likely to remain so in the months to come, according to the UN's Food and Agricultural Organisation.
The fund, which is domiciled in the UK and managed from Australia, invests in companies involved in the production, processing, distribution and marketing of agricultural products including seed, fertilizers, crop protection and machinery. It has around 22 million pounds ($35.5 million) in assets under management.
Rising food prices helped the fund achieve returns of 26.7 percent in British pounds in 2010 following its May launch. Any investors in the stocks of farm input companies, however, should also be wary that high commodity prices could dampen demand, Casarotto said.
"Food inflation is something that could lead to demand destruction."
For now, there are no signs that prices are reaching levels high enough to trigger this reaction, said Skye Macpherson, co-manager of the fund.
"The main difference from the 2008 spike is the oil price is lower, and you need oil to process, distribute and package food. Oil has a large impact on food inflation," Macpherson said.
Casarotto said food inflation was likely to be an ongoing concern in emerging markets, where a higher proportion of income is spent on food.
That includes China, where the government recently raised interest rates in a bid to tackle high inflation. People are waiting to see whether China's economic slowdown will have an impact on demand for commodities, Casarotto said.
"I would think that the biggest issue the Chinese government fears is social unrest. They will do everything they can to ensure there's adequate supply of reasonably affordable food," he added.
China's growing demand has led it to become a net importer of some commodities, for which it had been self-sufficient.
"Last year China imported 2 million tonnes of corn, and this year it could be importing as much as 9 million tonnes," Casarotto said.
Toronto-listed fertiliser company Potash Corp is the fund's largest holding and is attractive due to its ability to adjust production according to demand, Casarotto said.
Rising demand for fertiliser and anticipated merger and acquisition activity make the sector attractive, Casarotto said.
"If there is an overweighting in the portfolio, it is towards the nutrients sector," he added.
The fund invests as well in smaller fertiliser companies including Australia-listed Aguia Resources, which has a potash and phosphate project in Brazil, and Celamin Holdings, which has a phosphate project in Tunisia.
In other sectors, Syngenta, the world's largest agrochemical group, also trades at an attractive valuation, Macpherson said.
"Traditionally the company was more crop protection-based, but the GM (genetically modified) portfolio has grown significantly," Macpherson said.
Farmland companies also provide attractive opportunities as private companies that are buying up farms look to list on exchanges.
"Most farmland internationally is privately owned, so fund investments are more limited by the number of listed companies, but we think that will change," Macpherson said.
The equities fund has a three-to-five-year investment horizon and takes only long positions. In the event commodity prices decline, the fund would look to invest in the companies that benefit from lower prices, Casarotto said.
"The beneficiaries of such a move would be the protein producers," such as producers of chicken, pork and beef, whose input costs would fall, Casarotto said. - Reuters
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