Making money from agriculture is still no mean feat - you need to be on your toes and have a big slice of luck to avoid losing a fortune. That's not to say it isn't worth increasing your exposure to agriculture, and certainly the demographic imperative is inescapable. The global population is set to grow by a billion over the next 15 years, and as developing economies grow wealthier they're demanding increasingly protein-rich diets, too. In essence, that means more meat and more land for rearing, at a time when good arable land is becoming ever scarcer.
"If you look over a long-term horizon there's limited land available for intensive cropping that isn't currently in the production cycle," says Luke Chandler, senior soft commodity analyst at Rabobank in London. "There are some limited areas in parts of South America and the Black Sea region, but other than that most of the developed world is using all of its available land." There's also the risk of land degradation caused by intensive farming reducing available land further – not so much Peak Oil as Peak Soil.
In recent years, fears that these demographic trends would lead to tightening food supplies have already caused huge spikes in soft commodity prices, and governments around the world have started to take food security seriously. Between 2006 and 2008, the price of soft commodities such as wheat and soy trebled, resulting in soaring food bills around the world - in the UK, food price inflation hit a staggering 14.5 per cent by August 2008, although has since moderated.
And even as economic boom turned to bust, dampening demand for expensive foodstuffs, certain soft commodities remain at historically high levels and some countries continue to experience rampant food-price inflation. Cocoa and sugar have, notably, recently traded at respective 32- and 29-year futures highs, with the latter rising 128 per cent in the course of the last year as adverse weather conditions in 2008-09 hit production in key producing regions of India and Brazil. That's partly why food-price inflation in India is running at 18 per cent.
Such problems are further exacerbated as land is given over to the planting of crops for biofuels, and a key factor behind the 2006-08 spike was record high gasolene prices: the high price for crude effectively increased the financial incentive for biofuel production, which resulted in US farmers diverting corn to be used for that very purpose. In the past, it would have been relatively straightforward for the large end users of corn to simply substitute another staple, such as wheat, in order to mitigate the shortfall, but overall supply now stretches to meet demand – hence the price hikes.
The promise of agri-tech
But for every commentator predicting a Malthusian food crisis, it's possible to find another who believes that there is plenty more scope to increase food production capacity, through the expansion of arable areas and improved farming
"It's not all one-way traffic," says Mr Chandler at Rabobank. "There are technology gains that you can get through yield improvement through genetically modified organisms (GMO), or improving farming practices and efficiencies along the supply chain, including better road, rail and ports in new exporting countries in the developing world." The use of fertilisers is likely to increase, too, as emerging market farmers look to boost yields to keep pace with rising domestic and export demand. Companies such as Potash Corp of Saskatchewan will be the beneficiaries of improving fertiliser demand.
Mr Chandler points out that corn yields in the US have recently been rising despite unfavourable weather conditions, an indication that herbicide and insect resistant GMOs are working. From virtually nothing in 1996, GM now accounts for well over half of all US corn and soya crops, of which 70 per cent globally are now biotech. According to the International Service for the Acquisition of Agri-biotech Applications (ISAAA), the use of GM crops has led to increased production of 141m tonnes, equating to an economic uplift of $44bn (£27.6bn) in the 10 years since their commercial introduction. The ISAAA estimates that an additional 43m hectares would have been required to achieve this without biotech.
US agribusiness giant Monsanto has the largest share of the GM crop market, but there are numerous agri-biotechs around the world, including the likes of Futuragene and Plant Healthcare, that offer UK equity exposure to this major trend. The ISAAA expects adoption to rise sharply, and estimates that increased concerns over food security and the growing awareness of the environmental benefits of GM will see the number of biotech countries and plantings double by 2015 as new GM strains are introduced.
Mr Chandler says that GMOs are also being developed that allow crops to withstand even the more extreme weather conditions, such as drought or floods, that are usually responsible for supply shocks.
A world of food
But it won't just be Prince Charles who's unhappy at the increasing presence of GMOs in the supply chain – traders thrive on the volatility of the commodities market and won't thank agri-biotechs for smoothing out production cycles. However, commodities markets will continue to demonstrate the seasonality that accompanies their planting, growing and harvesting seasons. And the longer-term drivers mean that, on balance, it still makes sense to stuff some soft commodities into your portfolio – broker Merrill Lynch has said that it believes agricultural commodities are still in the early stages of a long-term bull run.
Meanwhile, with low correlation to equities, commodities are a good way of diversifying risk and increasing returns. While futures began life as a means for farmers and buyers to protect themselves from price volatility, soft commodities are becoming increasingly popular with speculators.
But while it is easier than ever to invest directly in agricultural commodities, it's still not for the faint-hearted. Prices can be highly volatile, not least because of the impact of currency movements, and understanding the cause-and-effect that drives price movements can be challenging.
