Over the past six months I’ve spoken to a lot of advisers, as well as self-directed investors, who have considered investing in Oil and Gold. When I ask what is drawing investors to these exposures I get different answers depending on the commodity. For oil, investors are telling me they are interested due to the historically low oil prices that I’m sure most of you are aware of. For gold –for the investors I speak to, the interest appears to be largely due to its diversification properties within portfolios, being largely uncorrelated to equity markets. Now, I’m sure you will all be aware that since the start of the year we’ve seen a lot of market volatility, and so it’s only natural for investors to look for a “safe haven” investment or for something that offers a greater level diversification.
The type of sentiments I’m describing above have been echoed in the financial press, as well as the mainstream media, with numerous stories about these two commodity exposures during the past few months that has helped fuel the overall interest.
Investing in agriculture has also received media interest this year. Examples include the high profile farmland sales of the S.Kidman & Co farm and more recently the Van Diemen’s Land farm in Tasmania to foreign buyers. These transactions have prompted debate (very heated at times, especially so from certain talk back hosts of one particular AM radio station I can think of!) as to whether there should be more locally based investment into agriculture.
I think it’s important to identify and understand the different types of agricultural investments that are available and how retail investors may access these. The above mentioned sales represent the sale of actual physical farmland, in the case of Kidman – used for cattle and Van Diemen’s – for dairy production. As the name suggests, farmland investing is essentially direct investment into the land used for the production of food and energy and takes into consideration the quality of the land base such as:
- fertility of the soil
- availability of water and climate issues
- overall productive capacity of the land
These factors are in addition to the actual long term appreciation of the value of the land and its related assets. Farmland investing can be attractive for some investors by offering genuine portfolio diversification as the returns have typically been uncorrelated to other asset classes, have potential to provide strong cash yields and offer a level of protection against inflation. However, by its nature, farmland investing is an illiquid investment that will more than likely have a lock-up investment period of usually around 10 years and you’ll also generally need a meaningful minimum amount to be able invest with a specialist investment manager in this space.
If minimum investment amounts and illiquidity do not appeal, there is another way of accessing agriculture linked investments – and that is via exposure to the commodities themselves. The key uses for agricultural commodities are for food production, feed grain and energy production and some examples of these that you are possibly using each day directly or indirectly include:
- ‘Lean Hogs’ (ie: Pork)
So why would you consider investing in any one of these commodities or a basket of them?
Similar to gold or oil, these types of commodities generally have had low correlations with equity markets, and hence can potentially act as a portfolio diversifier. There may also be specific reasons why you may choose to invest in one or another, for example, a natural disaster or climate related issue like drought, may impact the supply of something like wheat or to a lesser extent coffee.
In my view, there are three key reasons to consider having some exposure to a basket of agricultural commodities:
- increasing global population
- changing population demographics in developing economies
- government policies regarding fuel.
I’ll briefly take each of these in turn below:
It’s getting crowded
The World’s population is currently around 7.2 Billion and should swell to over 9.6 billion over the next 30 years leading up to 2050, according to the UN Food and Agriculture Organization (UN FAO). This would mean that global food production would need to increase by around 60% to meet the increase in demand. This increase also takes into consideration the ‘Grain Multiplier Effect’ – which is the extra demand for grain to be used as feed to produce livestock such as Cattle or ‘Lean Hogs’. For example, to produce half a kilo of beef requires just over 3 kilos of corn whilst for pork it’s a little under 2 kilos of corn according to the US Department of Agriculture. (Note – soybeans are also used extensively as a feed source for pork).
Urbanisation is increasing
The demand for food is furthered by the increasing urbanisation and per capita income levels of developing countries/emerging markets where increasing levels of wealth have been the catalyst for changes in dietary patterns, hence meaning the demand for food that we may consider everyday staples – such as steak, pork chops, lamb cutlets and chicken – is increasing in developing countries where the levels of population growth tends to be fastest.
Fueling the demand
Finally, the increasing global use of biofuels – sanctioned by governments throughout the world where targets have been set on their use, is likely to create further demand on commodities such as sugar, wheat and corn for the production of ethanol and biodiesel. China, France, Germany, Italy, Great Britain and the US all have mandatory levels aimed at ensuring biofuels are to be used more to decrease the reliance on fossil fuels.
In summary, population growth with demographic changes in developing economies combined with developed world government intervention, is expected to create increased demand for agricultural commodities in the future.
One simple way for retail investors to get exposure to important agriculture commodities and to seek to benefit from this investment theme would be through our BetaShares Agriculture ETF – Currency Hedged (Synthetic) (ASX Code: QAG). QAG aims to track the S&P GSCI Agriculture Index which provides investors with exposure to the global prices (the US prices) of corn, wheat, soybeans and sugar. Due to practical issues associated with buying and storing these commodities, the Index aims to track the prices of futures contracts over the commodities, rather than their “spot” prices. In addition, QAG is currency hedged which means that the currency fluctuations between the AUD and USD should not affect returns. QAG is available to trade on the Australian Securities Exchange during each day.
The index which QAG aims to track is based on the price of futures contracts. Investing in commodity futures is not the same as investing in the “spot price” of a given commodity. As such, QAG does not aim to, and should not be expected to, provide the same return as the performance of the spot price of the underlying commodities. The performance of ETFs that are linked to commodity futures may be different to the spot price for the commodity itself.