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Global Agriculture as an Emerging Asset Class - a HighQuest Partners published paper (2.20.2013)
by William J. Kiernan and Philippe de Lapérouse , HighQuest Partners

NOTE: This paper was published on the website of Global Business Magazine, Feb. 14, 2013. See the article online here.

According to estimates by HighQuest Partners, a global agricultural strategic consulting firm, the total market value of global agriculture value chain including the food and beverage sector in 2011 was in excess of $6.7 trillion, representing over 8.5% of the world’s economic activity, and is continuing to grow at 4 to 5% annually. In fact, agriculture is the third largest market globally following the currency and energy markets. Agricultural production and services accounted for approximately 40% of that total market, or $2.7 trillion.

With growing populations and expanding middle classes in emerging economies using their enhanced purchasing power to shift from predominantly grain-based diets toward increased consumption of animal protein, the demand for food, which is essentially inelastic, is accelerating the demand for increased volumes of agricultural commodites. At the same time, the agricultural sector is experiencing increased constraints on production, including the reduction of arable land suitable for crop production and shrinking natural resources, especially water. External pressures, both from nature (climate change) and man-made (renewable fuel policies mandated by governments) as well as declining rates of annual yield growth in major crops are posing key operating challenges to the agricultural industry which also provide interesting investment opportunities for corporate and institutional investors.

According to estimates by the Food and Agriculture Organization (FAO) of the United Nations, global agricultural output will need to increase by 70% by 2050 from current levels in order to meet projected demand arising from population growth, biofuel usage and improved diets. The necessary growth in agricultural output will require significant capital investment from both the public and (especially) the private sector to achieve. According toe HighQuest Partners’ estimates, production will need to grow at a rapid pace in order to meet growing demand. We project that just within the next eight years, global production of cereal grains and oilseeds will need to increase 20% from 2.5 billion to 3.0 billion metric tons.

While companies active in the agricultural value chain and private investors have long been investing in the agricultural sector, institutional investor interest in the agricultural sector really took off in the wake of the global financial meltdown in 2008. Interest was initially focused on opportunities to invest in farmland; as investors fled paper assets, they began to increasingly focus on real assets for their alternative asset allocations. The case for farmland investment is a strong one, including:

Farmland investment historically has provided attractive returns and low volatility. For example, in the U.S., the National Council of Real Estate Investment Fiduciaries’ (NCREIF) Farmland Index* realized a 10-year annualized return of 15.15% at a standard deviation of 8.92% for the period ended 12/31/2011.

*As of 12/31/2011, the NCREIF Farmland Index tracked 493 institutionally-owned farmland properties with an aggregate value of $2.86 billion.

Institutional investors tend to view farmland investment as “gold with a coupon” since it offers returns in two components, the long-term appreciation of the underlying land as well as an annual current income stream generated either from rental (cash lease) or direct operation of the farmland. As of 12/31/2011, the NCREIF 10-year annualized current income return on farmland was 6.96%. To complete the gold with a coupon analogy, farmland investments have historically provided an effective hedge against inflation, with returns in the U.S. positively correlated with inflation. Over the past 10 years, the correlation between the quarterly returns on the NCREIF Farmland Index and the Consumer Price Index is 0.32. Additionally, the returns on the NCREIF Farmland Index have been higher than the inflation rate in each of the past 10 years.

From a portfolio manager’s perspective, farmland provides attractive characteristics for portfolio managers given its inverse correlation with other asset classes, including stocks, bonds and commercial real estate. Adding farmland to a diversified portfolio brings overall portfolio volatility down, an attractive prospect for the portfolio manager seeking to boost risk-adjusted return.

The fundamentals driving the value of farmland globally are strong. A growing world population, increased urbanization, rising incomes in the developing world with commensurate shift in diets from grain-based diets to higher animal protein consumption, the increased use of biomass for biofuels, are expected to drive unprecedented growth in demand for agricultural crops over the next decade and beyond. This growth in demand coupled with constraints on supply due to reduced access to water, climate change and a deceleration in crop yield increases will likely put significant upward pressure on commodity prices and the value of farmland globally. Additionally, even when accounting for potential improvements in crop yields resulting from improved genetics and agronomic practices, significant additional farmland will need to be brought into production.

Over the past four years, investor interest in agriculture has expanded beyond the real asset class of farmland to include a wide range of investment opportunities and vehicles that provide exposure to the agricultural sector. These include opportunities in private equity (e.g., large farming companies, crop input manufacturers and distributors [seed, chemicals, fertilizer, technology services and capital goods], storage and logistics firms, value-added processing of ingredients, and food/feed/industrial processing), water themed investments, investment in liquid assets (public equities and commodity index funds) and venture capital (biotech and enabling technologies for crop production). In addition, depending on their appetite for risk and their return preferences, a growing number of investors are pursuing investment opportunities in frontier markets located outside the major origination markets in North and South America.

Following this year’s U.S. presidential election, global financial markets continue to be mired in turmoil and uncertainty with major questions over how the Euro Zone crisis and the looming fiscal cliff in the U.S. will be resolved. While there has been a substantial correction in prices for hard commodities over the past couple of months, corn and soybean prices continue to experience strong volatility and reach new historic high levels, in large part due to both increased global demand and the drought experienced in the U.S. this summer.

Throughout this period we have noted that strategic and financial investors continue to exhibit strong interest in allocating capital to investment opportunities across the agricultural sector. While expectations are that Brazil will eventually reconsider current restrictions on large-scale investments in farmland, an increasing number of projects to develop farmland in other countries in South America and regions of the world are attracting serious attention and commitments of capital. Examples of this trend can be found in Uruguay, Mozambique, Zambia, Tanzania, Australia, Ukraine and Russia.

Because of prolonged uncertainty in the financial markets, institutional investors continue to deploy strategies designed to preserve and, over the longer-term, build their capital bases. Given that fundamental factors are expected to continue driving demand for more agricultural production to supply food for a growing world population and biofuel replacements for fossil fuels, we expect the global agricultural sector to continue providing attractive opportunities for investors seeking to diversify their risk exposure while also benefiting from a long-term global meta trends.

ABOUT HIGHQUEST:

HighQuest Partners LLC (www.highquestpartners.com), headquartered in Danvers, Mass., USA, is a strategic advisory and management consulting firm, as well as the host of several annual agricultural trading and investing conferences. It serves corporations and institutional investors, as well as trade associations and governmental organizations operating and investing in the global agribusiness, food and biofuels industries. The firm’s seasoned team of advisors leverage a combined 150+ years of in-depth experience in agribusiness and the food industry and they have helped hundreds of clients address issues regarding strategy, investments, M&A targeting and due diligence, and governance.

Key to providing these insights is Global AgInvestingSM (www.globalaginvesting.com), which is the leading resource for events, research, and insight into the global agricultural investment sector. Since its inception in 2009, Global AgInvesting conferences have established themselves as the premier global agriculture investment conference series, and the most critical, as the events draw more senior-level decision makers than any other. Building on the success and popularity of these industry-leading events, Global AgInvesting launched its Global Ag Investing Research & Insight platform that complements the conference series by providing a range of services and industry intelligence (news and analysis, editorials, research pieces and an industry directory) designed to align the community of institutional investors and specialized fund managers allocating capital to the emerging agricultural sector.

HighQuest also hosts the annual Soy & Grain Trade Summit and Women in Agribusiness Summit, and through its Soyatech platform publishes information about agricultural markets through industry reports, eNewsletters, and the Soya & Oilseed Bluebook, the directory for the global oilseed industry.

ABOUT THE AUTHORS:

Philippe de Lapérouse is Managing Director of HighQuest Partners and is based in its St. Louis, Missouri office. He has more than 25 years of experience in senior leadership positions with global companies in the agro-industrial and value-added food chain as well as in private equity investing. He can be reached at pdelaperouse@highquestpartners.com or +1-314-994-3282.

William J. Kiernan is the Director of Global AgInvesting Research & Insight at HighQuest Partners LLC and has over 20 years of experience in the investment management and agriculture industries in finance, public equities, private equity and real estate investing. He is currently Director of Research & Insight for HighQuest Partners where he is responsibility for conducting and managing research in the agriculture and investment sectors, as well as providing advisory and research services to clients in these sectors. He can be reached at bkiernan@highquestpartners.com or 1-978-887-8800 ext. 119.

 

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