EQUITIES RESEARCH

Food Security to influence investment markets over the next decade

In October 2011, the world’s population reached 7 Billion. For someone like me, born in 1961, this is an alarming number, when you consider that back in 1961this figure was just over 3 Billion.

The dynamics around food are pretty straightforward: there are more and more people to feed, with less and less land available to grow food on, projecting a strong case for long-term food investment. It’s a classic supply and demand imbalance and an investment opportunity to be explored.

It remains difficult for investors in Australia to gain exposure to investment in the food industry. For a country that is a major producer of agricultural products and livestock, there seem to be but a limited number of food and agriculture stocks listed on the ASX.

Not only has the world population more than doubled over the past 50 years, but thanks to advancements in medical science, people are now living much longer with the proportion of the population aged over 65 expected to reach 16% by 2050.

Besides an ageing population, eating habits and attitudes to self-sufficiency are also changing with improved standards of living, particularly in emerging markets: not only are there more people but those people are getting wealthier, and there is a strong correlation between wealth and diet; as they get wealthier, they tend to consume more proteins, and this in turn puts pressure on demand and supply.

In order to meet increased demand, animals (such as pigs and cattle) tend to be produced more intensively, in turn putting more pressure on grain and oilseeds production used to feed these animals.

As Asia progresses through its economic development, China, and to a lesser degree India, are the major drivers. The ever growing use of fish, meat and dairy products in the Chinese diet, as a source of protein, has had and will continue to have an impact on the Australian and South American pastoral businesses. China’s insistence on being self-sufficient in wheat and corn has also resulted in less land available for growing soya beans, making China a huge soy importer and increasing demand on global supply.

With growth in population also comes the issue of land scarcity, making the investment case fairly simple to argue: we’ve got more people in the world eating more food, but less land to produce that food on. This in turn is creating a structural imbalance between demand and supply, causing a shift in agriculture prices above their long term average. Over the past 40 years, arable land available for agricultural production has more than halved and precious resources have increasingly come under pressure. The dramatic increase in the size and age of the population means that we will invariably see additional demands for food, water, energy, resources and everything else, lead to scarcity.

Food shortages could ultimately result in civil unrest and prompt economic migration. More pragmatically, that shortage arguably suggests a longer-term investment case. Shorter term, it’s harder to determine the direction of any commodity in these uncertain times, as price movements can depend on imbalances in short-term supply and demand, and on the weather.

Over the past decade, production of ethanol fuel has in part led to a doubling in the rate of global corn consumption, making the corn market the tightest it has been for years, and susceptible to significant movements in prices should any change in supply and demand occur.

Livestock

Alongside grains and other soft commodities, a lesser-known segment of the commodity world is livestock. One of the leading producers of sheep and cattle in Australia is Macquarie Group through its Paraway Pastoral, which runs large-scale sheep and cattle stations across NSW, QLD and NT. Unfortunately, investment in Paraway Pastoral is reserved to private and institutional investors only.

Some elements of livestock in Australia are distinctive to this country, making the local industry a potentially attractive investment. While Australia ranks second as a global exporter of beef behind Brazil, it ranks first by value, attracting a higher price in recognition of being a consistent provider of high-quality, disease-free meat. Most cattle in Australia are grass-fed, which is cheaper than the feed lock system common in the US, considered more humane and reduces correlation to rising grain prices. Australia has a lot of land to allow a pasture-based system, is closer to key Asian markets than Brazil, with cost and time benefits, and, more importantly, is disease-free, having never suffered any outbreak of an export-restricting disease, a function of being an isolated island with strict quarantine and a livestock identification system. Once an animal leaves a farm in Australia, it must be electronically tagged, enabling the meat to be traced back to the paddock of origin. All of these things make Australian livestock a compelling investment case, but unfortunately for retail investors, it can be hard to gain exposure to this market. Macquarie Group may offer retail investors exposure to this market in the future, but for now the more obvious exposure is through listed companies, the principal example being the Australian Agricultural Company (AAC), Australia’s biggest exporter of live cattle.

Retail investors can also gain exposure to soft commodities, such as the wheat market through Grain Corp Ltd GNC, the only remaining wheat handling and export company listed on the ASX. Exposure to other agriculture markets can be accessed through Incited Pivot IPL and Nufarm NUF (insecticide and herbicide), Rural Holdings RHL and Elders ELD (diversified agricultural), Ridley Corp RIC (salt and feedstock), Select Harvests SHV (almond production), Prime Ag PAG (wheat, cotton, and water rights), Tassal Group TGR (aquaculture), Warrnambool Cheese and Butter and Bega Cheese (dairy products).

Please note that any investment in commodities and agriculture carries potential risks that could result from unpredictable and uncontrollable events such as floods, droughts, natural disasters, etc. Any information and comments made above are of general nature and should not be construed as investment advice. Investors should seek professional advice in relation to their financial and investment needs, and should not rely on the above information to make investment decisions.

Hot Issues


Political shenanigan in an election year will ensure no enonomic recovery in the US until 2013 | Europe will unwillingly accept its economic reality, Eurozone will face structural change as peripheral countries finally default leaving bond markets in chaos | China will move to slow its economy to avert economic meltdown as export-led recovery fails to materialize. This will impact the resources boom in Australia, lead to higher unemployment and potential recession spurred by weak manufacturing and retail