It's a somewhat ironic twist, because once upon a time agriculture exerted a similar influence over the UK markets. "40 years ago there were 700 listed plantation owners in London, 10 per cent of the FTSE. Today there are just a few of us left", says Peter Hadsley-Chaplin, chairman of MP Evans, which at 130 years old is the UK's oldest listed agricultural business and one of the few survivors.
According to Ranald Mitchie's History of the London Stock Exchange, plantation shares were in such huge demand at the turn of the 20th century that the London Stock Exchange could not satisfy the market. This led to the formation of a rival trading place, the Mincing Land Tea and Rubber Broker's Association in 1909 "to provide a market for the vast speculative business in plantation company shares being generated at that time, stimulated by the inflated prospects for rubber tyres from the bicycle and motor car industries".
But in 1933, the nominal value of securities involved in tea, coffee and rubber plantations was £69.1m, only marginally smaller than the value of mining securities, then worth £76.1m. Fast forward to 1970 and plantations were worth just a seventh of the value, partly the result of, as Mr Hadsley-Chaplin points out, decades of politically instability around the world and significant nationalisations. That political risk still hangs over the global agricultural industry, and investors looking to take advantage of the global agricultural land grab by sovereign and nations and funds including Berkshire Hathaway should tread carefully – already Brazil, a major agricultural producer, is now clamping down on foreign purchases of farmland, but other nations may take more extreme steps.
Of course, although there are few agricultural companies listed in London today, investing in agriculture is making a comeback, thanks mainly to the rise of Exchange Traded Commodities. These offer exposure to a range of underlying soft commodities, which can be traded individually or through baskets linked to Dow Jones-UBS commodity indices, with investors able to take long or short positions.
However, investing in commodities directly via ETCs - or spread betting, another way to play crop prices - is not an exercise for the faint hearted. Soft commodity investing has been plagued with volatility in recent years, with unexpected climatic events - like this summer's wildfires in Russia and floods in Asia - causing sudden sharp swings in the prices of key commodities such as wheat and cotton. "What we've seen in the past three years is what I call rapid cycling where we've seen the cost of wheat go from £80 a tonne up to £180 back down to £80 a tonne and now back up again", says Marc Duschenes of Braemar Securities, who runs the UK's only dedicated farmland fund.
While he points to the underlying trend of population growth and increasingly protein-rich westernised diets in Asia as a key driver of soft commodity inflation, the volatility he refers to is more likely to be the result of speculation rather than demand fundamentals - as he says: "hedge funds coming in and out of the market".
| An opportunity closer to home - farmland |
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Viz magazine's Farmer Palmer was always notoriously protective of his land, and with good reason - as a report from property specialist Knight Frank shows, UK farmland had risen in value by 164 per cent over the last decade, making it the best performing asset class bar gold. The FTSE 100 has fallen 22 per cent over the same period. Like residential property, UK agricultural land has benefited from the availability of cheap money and scarcity of supply – and as Andrew Shirley at Knight Frank points out, that's not a situation that's likely to change soon. "The ongoing imbalance between supply and demand means prices will continue to increase and may well double before the end of the next decade," he says. "The majority of owners hold land as a long-term investment and currently have little incentive to sell." The consultant says acreage sold in 2009 was 30 per cent lower than the previous year, while Savills estimates that there is £7.5bn waiting to be invested in farms and country estates. It says that could cause values to rise by 6 per cent a year for the foreseeable future and to be 25 per cent higher as soon as 2014, when prime land could reach £10,000 per acre. Unfortunately, short of buying a working farm directly or paying a contractor to farm you're land for you, it's surprisingly difficult to buy into UK farmland – of course, you can roll up your sleeves and do it yourself, but a prime small 100 acre farm will still cost you £750,000 and the strains of farming may not be a lifestyle choice many are prepared to take. And although some managers will include it within a more diversified portfolio of assets few funds offer direct exposure to agricultural land, because farmland doesn't change hands very often, especially at the transaction size mainstream funds would need to make it worth their while. "It's the real Cinderella of the property sector, people overlook it," says Marc Duschenes of Braemar Securities, one of the few UK managers specialising in agricultural land investment. "You need niche fund managers like us to bring alternative assets to market", he says. Braemar – a Channel Islands based open-ended fund - owns 1,300 hectares of arable farmland in the East of England used exclusively in the production of grains and plans to triple the size of the fund over the next year. With a minimum £10k unit size, the fund is one of the most accessible ways of gaining exposure to farmland. "What does that buy you in terms of acreage? Two acres. But you can't buy two acres", says Mr Duschenes. "But we can offer 2 acres worth of exposure, we are effectively unitising farmland into a security." That's helped it attract a diverse range of investors, from older clients looking for capital protection to younger, well-advised City professionals who've noticed the serious outperformance of farmland and want to diversify their wealth across asset classes. As Mr Duschenes points out, farmland offers investors the best of both worlds - strong returns from a fundamental growth story driven by demographic trends, but with much lower volatility than the crops themselves. "Investors are looking for stability, under-gearing and genuine diversification without any tenant risk, and farmland fits the bill." |
Cross your palms with profits
For anyone who wants to gain exposure to agriculture without engaging in the risky and complicated business of futures trading, the legacy of the UK's colonial past still offers up some interesting opportunities. The UK may no longer lay claim to vast swathes of the world's land, but a number of companies are emerging alongside the resilient MP Evans to breathe new life into UK agricultural investment opportunities.
The UK produces 60 per cent of the food it consumes, and is self sufficient in 74 per cent of indigenous crops, but there are some things which simply cannot be grown here. One of these is palm oil, an increasingly important ingredient used in the manufacture of everything from biscuits to baby lotion - almost every chocolate you've eaten this Christmas will have been manufactured using palm oil, although if you check the ingredients you're more likely to see it described in generic terms as vegetable oil.
The reason for this is that there is still an environmental albatross hanging around the palm oil industry's neck. Because palm oil can only be grown in tropical climates, rising demand has led to significant deforestation, particularly in South East Asia, home to the endangered Orang Utan and which accounts for 85 per cent of palm oil production. "Products we consume every day see land taken from the rainforest", says Andrew Mitchell, chairman of the Forest Footprint Disclosure project, an initiative aimed at encouraging business to recognise their impact on ecologically sensitive areas of the planet. "There is no doubt that we are getting food on the cheap - producing stuff badly is cheaper than producing it well," he says.
And with large customers becoming increasingly fussy about the providence of the ingredients they use, the industry is taking steps to become more sustainable, led by the Roundtable for Sustainable Palm Oil (RSPO). The organisation has developed an accreditation scheme, and those that can meet its stringent criteria are able to charge a premium of around 5-10 per cent for their product.
However, palm oil is unlikely to lose its crown is the world's most widely used edible oil, mainly because it is indeed significantly cheaper to produce than other vegetable oils, and easily used as a substitute in many applications. As Mr Hadsley-Chaplin at MP Evans points out, as a crop it is 10 times more productive than soy oil, for example, producing a yield of 7 tonnes per hectare against just 0.7 tonnes for soy, at a cost of just $200 a tonne, versus $600 for soybean oil. Competing oil seeds like rape and soy are annually planted, adding to the production cost, and compete with grains for land.
Of course, the share prices of palm oil producers are, equally, subject to the ups and downs of the raw commodity they're producing, crude palm oil, which is extracted from the fresh fruit bunches grown on their plantations. This year, CPO has risen steadily since July, when it traded at $800 a tonne, to around $1,200 a tonne today, lifting the prices of producers with it. This is partly the result of a general rise in the prices of other commodities - including oil with which most oils are closely correlated – and partly the result of poor forecast harvests for competing crops, but also the result of secular growth in demand for palm oil as more and more consumers in countries like India and China develop a taste for processed foods. Consumption in these countries is currently well below the global per capita average of 21kg per capita, and worldwide demand for palm oil is expected to continue climbing at 10 per cent a year against just a 4 per cent increase in supply, due to the difficulties in finding new acreage and the 3 to 4 year gestation of new plantings.
However, some analysts are not confident that this price is sustainable. "We have not changed our long-term palm oil price assumption of $750 a tonne," says analyst Graham Jones at broker Panmure Gordon.
| Farming inputs offers |
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Mark Twain once advocated buying land for the simple reason that it will always have a floor to its value because "they don't make it anymore". But the finite nature of land also means that, theoretically, our ability to produce food is finite too, as anyone of a Malthusian disposition would agree. Fortunately for mankind, that's not necessarily true, mainly because advances in agricultural technology have improved yields and mean land is now much more productive. No development was less important than the invention of the Haber-Bosch process in the early 20th century, which enabled the mass production of synthetic fertilisers through the extraction of nitrates from air and is believed to underpin around a third of global food production today. More recently, companies like Monsanto and Syngenta have made further strides in crop technology with Genetically Modified seeds designed to improve yields or resistance to extreme weather, as well as the pesticides they sell in combination. But one of the hottest stories on the markets today involves a mineral fertiliser that's almost as old as civilisation itself: potash. Nothing highlights the increasingly strategic importance of potash - potassium carbonate, used in almost a third of global agricultural production - more than BHP Billiton's recent unsuccessful pursuit of Canada's Potash Corporation of Saskatchewan. Its $39bn bid marked the latest - and largest - development in a frenetic period of consolidation in the potash mining industry, which had already seen BHP snap up Athabasca Potash for $321bn in January. And with China's Sinofert and Brazilian miner Vale both rumoured to be considering a counterbid, and Rio Tinto said to be eyeing Russia’s Uralkali, conditions are still ripe for further corporate activity. While China and Brazil are major agricultural producers, both countries have relatively poor soils and are major importers of potash. While this gigantic global power struggle plays out, one UK-based fertiliser provider offers an interesting opportunity at the smaller end of the spectrum. Aim-traded Sunkar mines phosphate, another commonly used mineral fertiliser, and its 293m tonne measured and indicated ore resource should support 20 years' production. In September, it signed a $200m financing agreement with the Eurasion Development bank to build a large plant in Kazakhstan, and expects to deliver results of its feasibility study imminently. Other providers of agricultural inputs on the UK markets included Plant Impact and Plant Health Care, which offer yield enhancing technologies, and Genus, a provider of porcine and bovine breeding products. |
