Buy the farm
16 Jan 2013
With agriculture set to take over from mining and resources as the next boom, is now the time to invest in agricultural commodities? We show you how to get into the market.
A surge in food demand from developing countries such as China and India makes it likely we will see an ‘agiboom’ quite soon, but it’s not all necessarily good news: that boom could also trigger a significant increase in prices of food, such as bread, beef, lamb and corn.
Retirees could aim to kill two birds with one stone by investing in agriculture: profit from an ‘agriboom’ and also get a hedge – protection – against higher food prices.
The average retiree, however, can find it difficult to buy into agriculture, particularly if they don’t want to actively trade risky commodity futures or get their hands dirty and buy a farm. While new products, particularly exchange traded funds (ETFs), can make investing in agriculture cheap and easy, ease and opportunity don’t necessarily mean retirees should invest too much in agriculture given its volatility.
“Agriculture as an asset class is generally too volatile to be suitable for retirees who should be in the conservative phase of their investing life,” says Dugald Higgins, a senior investment analyst at Zenith Investment Partners.
Agriculture bulls believe the sector is where the resource industry was a decade ago. They argue that global population growth and the rise of emerging economies such as China will significantly boost demand for agricultural products, including ‘soft’ commodities like wheat, corn and soybeans. But there is limited land available to meet this growing need.
“The fundamentals increasingly point to soft commodity prices going to a new phase of growth,” Higgins says.
Most investors only have exposure to agriculture indirectly. Their super fund may hold shares in the likes of beef producer AACo, or fertiliser company Incitec Pivot.
In a portfolio though, it’s an excellent diversifier: when equities and fixed income returns have been negative, commodities have typically generated strong returns.
When inflation accelerates, real tangible assets such as agricultural commodity prices also outperform. That inflation could also make food more expensive. Drew Corbett, BetaShares’ head of investment strategy and distribution, says investing in agricultural commodities could help retirees offset some of the impact of food price rises.
Where to invest
There are a number of ways for retirees to invest in agriculture, and each has pros and cons. The most obvious is to buy a farm, but buying a viable economic farm costs millions of dollars, and it has to be managed well, which won’t suit many retirees.
Another easy way is to buy agricultural stocks, such as dairy company Warrnarnbool Cheese and chemicals company Nufarm, which are liquid. But agricultural stocks tend to be cyclical and therefore require expert timing. The choice of stocks is also relatively limited. Corbett notes that agricultural companies make up less than one per cent of the market capitalisation of the ASX.
For a more ‘pure’ direct exposure to agricultural commodities, retirees can trade derivatives: agricultural futures, contracts for difference (CFDs) and options. The ASX offers futures such as grain and oilseed, but this sort of investing is not within everyone’s reach. Retirees need “big licks of money” to trade futures through a broker, according to Higgins, who suggests that it’s best left to the experts.
Retirees can take small exposures to agriculture through a simple ETF such as BetaShares’ Agriculture ETF. It is listed on the ASX and tracks the S&P agriculture select index. It aims to deliver the return of the four major ‘soft’ commodities: corn, wheat, soybeans and sugar. It trades like a share, so is liquid, and it doesn’t require large sums as there is no minimum investment.
While the Agriculture ETF does make it a lot easier for the average retiree to buy commodities, it won’t deliver income. “It is essentially a way to speculate on commodity prices,” Higgins says.
It is also volatile. Commodity prices can surge or crash in a short period due to factors such as extreme weather. That makes it a bumpy ride, and means that it may not be suitable for retirees looking for investments that provide reliable returns or income.
Higgins says a retiree with a large portfolio invested in low-risk assets, and who has a high risk tolerance, may choose to speculate on commodities, though exposure should be no more than five per cent of their portfolio.
Some retirees may choose to ride that volatility in the hope of profiting from the next boom, and offsetting that more expensive loaf of bread they may face in the future. But they need to be ready for a wild ride. “It’s going to be a very volatile sector,” Higgins says.
®