While there may be a deepening crisis in feeding the world’s growing population, made worse because of the spike in food prices over the past year, there is also an emerging new asset class befitting the trend for funds to search for uncorrelated alpha-generating investments.
A recent paper by Deutsche Asset Management details the confluence of events which have led to the recent spiralling price of a range of agricultural products. The paper also makes a strong case as to why the trend is here to stay. “Structural developments – especially in developing nations – such as consistently resilient economic performances, rapid population growth and urbanisation, rising incomes and the consequent increase in demand for higher-cost higher-protein foods – constitute important lasting changes for agricultural commodities markets …"
Moreover, as demand for food rises inexorably, additional strain is exerted upon the world’s dwindling supply of grains as the escalation of biofuels production diverts both land and crops away from food production…
"World inventories of grain are at multi-decade lows and several developing nations – China most notably – have become net importers of grain to address shortfalls in domestic output for the first time in years, if not decades. Demand, in short, is voracious and unlikely to be satisfied by output for a prolonged period. Today’s high prices for agricultural commodities will be sustained for many more years,” the paper concludes.
Frontier Investment Consulting was also finalising a paper on agribusiness as an asset class last month. This is expected to be distributed to clients soon. Deutsche, which launched a global agribusiness fund early last year, did not initially factor in the added impact of global warming on the production of food when work began on the asset class in 2005.
Since then, the firm says, this has been classified as another “inevitability” in support of global agribusiness. According to World Bank data, food prices rose almost 75 per cent between 2000 and 2007 and are expected to remain elevated for at least several more years, if not the next decade.
According to the Bank of International Settlements, agricultural commodities derivatives trading jumped by 53 per cent in the third quarter last year, leading to a 26 per cent increase in the number of commodities contracts traded overall. The increase for agricultural derivatives trading was almost entirely driven by activity on the Chinese exchanges.
The United Nations has predicted that the world population will be 8.13 billion people in 2030 compared with 6.45 billion in 2005. And 55 per cent of Asia’s entire population will be living in cities by 2030 compared with 40 per cent at present.
The Deutsche global agribusiness fund has returned about 15 per cent in its first year, hedged back to $A, compared with a minus 5 per cent return from the MSCI World.