Go for greener pastures
By Lesley Parker | theage.com.au | 18 April
Agricultural commodities - from wheat to sugar and beef - are being hailed as the new investment hot spot but it's an area that can be tricky for retail investors to tap into.
Proponents of investment in agribusiness generally, or "soft" commodities specifically, say big-picture trends show there is a new commodity boom - this time in rural products rather than in metals and other resources.
First, rising living standards in emerging economies such as in Asia and Latin America mean people there are changing the way they eat - consuming more meat and milk, for instance. In some parts of Chinese society, drinking coffee rather than tea is something of a status symbol. Second, there's a view that growing demand for biofuels - as oil becomes scarce and even more expensive - will have a significant impact on prices for crops such as sugar and corn that provide raw material for alternative fuels. It may also reduce the land available for food production, sending prices higher.
Climate change is expected to be a third influence, as changes in weather patterns affect crop yields. Short supply of agricultural commodities that are in demand can only equal higher prices. It also makes it harder to fell trees to make way for crops.
Analysts are describing these trends as "secular", by which they mean they're long-term changes that will have a continuing impact, rather than just the usual cyclical ups and downs any market experiences.
The Reserve Bank of Australia commodity index clearly has been trending higher since 2004 and is up 9.5 per cent during the past 12 months in SDR terms. (Using "special drawing rights", an international monetary measure, differences caused by currency fluctuations can be ironed out.)
But the rise isn't all about iron ore and gold. Drill down into the index for March and you'll see that rural commodity prices are 37 per cent higher than they were a year earlier, while non-rural commodity prices are just 3 per cent higher.
That's what happens when a commodity such as wheat nearly triples in price in a year; sugar has risen about 50 per cent.
Commodity Warrants Australia managing director Peter McGuire is convinced the escalation of agricultural commodities prices will be a long-run affair rather than a case of boom then bust, as some people suggest.
"The world is changing and it's changing very, very quickly," he says. "I've just returned from China and India and they're on fire - they want what we have and they don't want it in the next generation, they want it in this generation."
Investment consultant Michael Blayney, who advises institutional investors on behalf of Watson Wyatt, says this "emerging wealth story" isn't likely to be greatly dampened by the financial and economic woes spreading from the US. He says Asian economies have large pools of savings and increasingly trade with each other rather than being reliant on the US.
Blayney is not so sure about the biofuels side of the story. It's a potential driver, he says, "But it's going to depend on where the oil price is, on government policy, on other alternatives [to petrol] - it's a riskier story. [However] we believe the emerging wealth story is a very good long-term story."
The key words are long term.
"Commodities are volatile, and individual commodities are going to be more volatile than the equity market," Blayney says. "So, you really do need to be in it for the long term - certainly not five years but I would say 10 years, perhaps longer."
McGuire lists as potential risks factors such as unfavourable weather, pests and diseases and even regional conflict.
Blayney points out that conditions can change in the rural sector much faster than in mining, where a commodity can stay in short supply - and at high prices - for years while exploration and mine development take place.
"The risk with these [rural] commodities is the price goes up, farmers rotate crops to the thing that's gone up, creating a boom-bust cycle," he says. "Certain crops can be rotated quickly, so conditions in that commodity market can change quickly."
Bearing these things in mind, how can an individual investor get involved?
CWA introduced commodity warrants for retail investors just under three years ago as commodities really started to boom.
It sells warrants on commodities and financial markets, including crude oil, gold, live cattle, corn, orange juice, coffee and the major US share indexes.
A warrant is a bit like an option. Investors can buy CWA warrants over a commodity, or commodities, nominating whether they think the price will rise or fall.
A "bull warrant", for instance, will make money if prices for the nominated commodity rise; a "bear warrant" will make money if prices fall.
There are a number of other variations on the theme and CWA says investors risk only a fixed amount if prices move the wrong way for them. Investors can get into warrants with as little as $3000.
Investing directly in agricultural stocks is another route but that comes with its own risks.
The share price may already reflect higher returns for that company's produce; the company may be locked into contracts at lower prices; or it may just be poorly managed. Stocks such as fertiliser company Incitec Pivot, however, have benefited as growers have bought more of their products.
Blayney says diversification - in stocks, sectors and geography - is essential. Managed funds may provide that for individuals interested in this investment "theme". DWS Investments, part of Deutsche Bank, is one of the few managers to offer a specific agribusiness fund to Australian investors. It launched the DWS Global Equity Agribusiness Fund in Australia a year ago. The fund requires a minimum investment of $25,000.
DWS investment specialist Jody Fitzgerald says the fund invests in listed companies around the world and all along the food chain, from growers, producers of feeds and fertilisers and equipment manufacturers through to logistics companies that distribute food.
Australian fertiliser and chemicals group Nufarm is among its investments.
"Rather than just being focused on the underlying soft commodities such as corn or wheat, we invest across any company that can benefit," Fitzgerald says. "By investing across that entire food chain, we are less exposed to one individual risk."
The fund is fully hedged, so investors won't find themselves unwitting currency speculators as commodity prices move along with the rise or fall of a commodity denomination such as the US dollar.
Agribusiness specialist Great Southern, known for managed investment schemes that give investors direct ownership of agricultural assets such as olives, grapes, timber and cows, now also has a managed fund in which investors can buy units.
The Rural Opportunities Fund requires a minimum investment of $10,000 and invests in rural properties, infrastructure and operating assets in areas such as poultry farming, wine and sugar production.
Somewhere in between a stock and a fund is PrimeAg, an agricultural investment company that listed on the Australian Stock Exchange last year. It will invest in agricultural land and water rights with the aim of taking advantage of the demand for soft commodities. Its chairman is a past National Farmers' Federation president, Peter Corish, while former Woolworths executive Roger Corbett is the deputy chairman.
First published by TheAge.com.au on April 18 2008
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