Opalesque Industry Update - Jonathan Blake, manager of the Baring Global Agriculture Fund, believes the current environment of elevated prices for soft commodities offers some very attractive investment opportunities within the agriculture asset class for 2011. |
He explains, “Bad weather has continued to disrupt the supply of grain and soft commodities, pushing prices higher. Corn, wheat and soybean prices rallied sharply over the last three months of 2010 as La Niña related weather events in Australia and Argentina reduced yield expectations in North America. Furthermore, ongoing export restraints in Eastern Europe significantly tightened up the grain and oilseed market fundamentals.
“The strength in grain markets has led to a significant improvement in farmer profitability and will act as an incentive to maximise yield, which should result in strong investment into fertilisers, agricultural machinery, grain handling and processing services.”
The Baring Global Agriculture Fund, launched on 15th January 2009, has over one third of its assets exposed to agrochemicals and around 10% of assets invested in companies providing machinery and equipment to farms and farmers.
Barings believes fertiliser prices, particularly nitrogen and phosphate based fertilisers, have already begun to reflect this rise in demand as farmers and distributors have been restocking ahead of the northern hemisphere planting season. Given the desire both to maximise yield as well as to affect a recovery in production in those countries significantly impacted by weather events, the firm anticipates that demand for fertilisers, herbicides and seeds will remain robust in the coming year and as capacity utilisation increases, this will lead to greater pricing power by producers.
Blake continues, “The agricultural machinery sector is also benefitting from both improved farming economics and improving credit market conditions as machinery orders in Latin America and North America showed a strong uptick in 2010. We believe that Europe and ongoing support from emerging markets will continue to drive volume recovery through the course of this year. The fund is positioned to benefit from any upswing in growth in demand for farm equipment through makers such as CNH Global and Deere & Co.”
The Baring Global Agriculture Fund, which has just celebrated its second anniversary, has the flexibility to invest throughout the entire agribusiness asset class, allowing the fund to be positioned for the predicted market environment. The fund has £143 million assets under management1 and returned 17.3%2 over one year compared to its index, the MSCI All Countries World Total Gross Return Index which returned 13.5% (as at November 2010).
Blake concludes, “Although we anticipate that grain and soft commodity prices will remain elevated for some time to come, should we become more cautious about equity markets or negative on the grain and soft commodity markets, then we can increase exposure to the more defensive downstream sectors such as food manufacturers and food retailers. The companies residing in these sectors should exhibit a more stable earnings trajectory as input costs fall while prices are maintained.
“The long-term outlook for agriculture is very positive, underpinned by key drivers of demand such as a rising global population, higher protein consumption in emerging markets, especially Asia, and increasing biofuel usage.”
Baring Asset Management is part of the MassMutual Financial Group, a global, diversified financial services organization. Massachusetts Mutual Life Insurance Company (MassMutual) is one of the largest life insurance businesses in the USA. www.barings.com