Interactive Investor | 13 November 2011
By Sophia Grene, Financial Times
The invisible hand of the market may eventually solve the problem of food supply in an overpopulated world, but investors cannot be absolved of responsibility for helping that hand reach its goal, according to fund managers focusing on agricultural investments.
It is a problem that urgently needs a solution. According to the Food and Agriculture Organisation of the UN, more food will have to be produced in the coming decades than has been produced during the past 10,000 years combined. To put figures on it, the FAO reckons as much as $100bn a year should be invested in agriculture in developing countries to raise global food output by 70 per cent, which it deems necessary to make sure more people do not go hungry.
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Investors looking at the agricultural sector face a plethora of ways to gain exposure. Possibilities include the soft commodities futures market, private equity-style land investments, debt financing and listed equities. The decision involves not only considering where such asset allocations might fit in a portfolio, but also the motivation for making such an allocation. “Are you looking at solutions rather than looking to benefit from the situation?” asks Ralf Oberbannscheidt, who manages DWS’s €2.2bn ($3bn) Global Agribusiness Fund, as well as institutional mandates.
The debate over the ethics of investing in commodities futures is ongoing – the camp claiming such speculation drives prices higher and increases volatility has gained ground recently as public opinion has moved against derivatives trading generally. Academic judgment based on evidence from the one real test case, the impact of the US Onion Futures Act 1957, which banned trading in onion futures, is mixed.
For Mr Oberbannscheidt, futures trading not only fails the “solution” test, but is undesirable because the market is fundamentally distorted. “Soft commodities are traded very inefficiently,” he claims. “They lag in reaction to global events, mostly because the market is so US-centric.” These markets are mostly driven by experts in futures trading rather than in food production, he adds, pointing out that for food “the clearing mechanism is war, not price”.
In its most recent Food Outlook, the FAO says: “Letting international markets continue in their present state, volatile and unpredictable, will only aggravate an already grim outlook for world food security.”
In the past three or four years, investments in agricultural land have seen a surge in interest, but more recently they have come in for critical scrutiny from non-governmental organisations such as Oxfam, which is running a campaign called “Grow” to highlight the impact of international land investment on local populations.
To mitigate some of these problems, a working group of the UN Principles for Responsible Investors has come up with a set of principles for responsible investment in farmland.
But in addition to the potential ethical issues, many investors were disappointed by the returns from early land investments. “The majority of projects either have unrealistic yield projections, lack management capacity, don’t have the right time horizon or there are issues with title to the land,” says Mr Oberbannscheidt.
A further issue is that in some areas, such as Brazil, land values have jumped to make it a less desirable investment. “There’s been a bit of a scramble for land ownership,” says David Creighton, chief executive of Canada-based manager Cordiant Capital, which specialises in private sector debt in emerging markets. “Prices have really taken off in Brazil, to the point where the model is not so robust any more.”
Instead, Cordiant Capital, which has been lending to agribusiness projects for 10 years, concentrates on categories such as machinery and equipment manufacture, fertiliser production and grain handlers. Mr Creighton says Cordiant deals typically offer spreads of 3-6 percentage points above Libor for senior secured debt. In terms of credit risk, Mr Creighton says Cordiant exploits “the glass ceiling for companies in emerging markets, which are perceived to be limited by the credit rating of their country”. With appropriate due diligence, he says, the portfolio can search out lending opportunities that are effectively investment grade, particularly given that they are usually backed by real assets such as land or machinery.
Although debt financing can reach investment opportunities that may not make it to the equity market, not all investors are comfortable yet with the idea of private sector debt in emerging markets. Greater transparency and liquidity should be found in listed equities.
Mr Oberbannscheidt is still convinced publicly listed shares are the best way for investors to participate in both the investment opportunity and the solution to the problem. “We need to improve efficiency in the whole value chain,” he says. “For that to happen, you need to invest in equities.”A stumbling block is that equity investors rarely have a sufficiently long time horizon for efficient investment in the sector.
While his fund urges investors only to participate if they have a three to five-year time horizon, Mr Oberbannscheidt confides the lower limit is a concession to investors’ short-term bias. “Investors are struggling to extend their horizons to three years,” he says, even though many of the developments his investee companies depend on, such as new seed technologies or new potash mines, will take longer to become profitable.
By Sophia Grene, Financial Times
The invisible hand of the market may eventually solve the problem of food supply in an overpopulated world, but investors cannot be absolved of responsibility for helping that hand reach its goal, according to fund managers focusing on agricultural investments.
It is a problem that urgently needs a solution. According to the Food and Agriculture Organisation of the UN, more food will have to be produced in the coming decades than has been produced during the past 10,000 years combined. To put figures on it, the FAO reckons as much as $100bn a year should be invested in agriculture in developing countries to raise global food output by 70 per cent, which it deems necessary to make sure more people do not go hungry.
More
Investors looking at the agricultural sector face a plethora of ways to gain exposure. Possibilities include the soft commodities futures market, private equity-style land investments, debt financing and listed equities. The decision involves not only considering where such asset allocations might fit in a portfolio, but also the motivation for making such an allocation. “Are you looking at solutions rather than looking to benefit from the situation?” asks Ralf Oberbannscheidt, who manages DWS’s €2.2bn ($3bn) Global Agribusiness Fund, as well as institutional mandates.
The debate over the ethics of investing in commodities futures is ongoing – the camp claiming such speculation drives prices higher and increases volatility has gained ground recently as public opinion has moved against derivatives trading generally. Academic judgment based on evidence from the one real test case, the impact of the US Onion Futures Act 1957, which banned trading in onion futures, is mixed.
For Mr Oberbannscheidt, futures trading not only fails the “solution” test, but is undesirable because the market is fundamentally distorted. “Soft commodities are traded very inefficiently,” he claims. “They lag in reaction to global events, mostly because the market is so US-centric.” These markets are mostly driven by experts in futures trading rather than in food production, he adds, pointing out that for food “the clearing mechanism is war, not price”.
In its most recent Food Outlook, the FAO says: “Letting international markets continue in their present state, volatile and unpredictable, will only aggravate an already grim outlook for world food security.”
In the past three or four years, investments in agricultural land have seen a surge in interest, but more recently they have come in for critical scrutiny from non-governmental organisations such as Oxfam, which is running a campaign called “Grow” to highlight the impact of international land investment on local populations.
To mitigate some of these problems, a working group of the UN Principles for Responsible Investors has come up with a set of principles for responsible investment in farmland.
But in addition to the potential ethical issues, many investors were disappointed by the returns from early land investments. “The majority of projects either have unrealistic yield projections, lack management capacity, don’t have the right time horizon or there are issues with title to the land,” says Mr Oberbannscheidt.
A further issue is that in some areas, such as Brazil, land values have jumped to make it a less desirable investment. “There’s been a bit of a scramble for land ownership,” says David Creighton, chief executive of Canada-based manager Cordiant Capital, which specialises in private sector debt in emerging markets. “Prices have really taken off in Brazil, to the point where the model is not so robust any more.”
Instead, Cordiant Capital, which has been lending to agribusiness projects for 10 years, concentrates on categories such as machinery and equipment manufacture, fertiliser production and grain handlers. Mr Creighton says Cordiant deals typically offer spreads of 3-6 percentage points above Libor for senior secured debt. In terms of credit risk, Mr Creighton says Cordiant exploits “the glass ceiling for companies in emerging markets, which are perceived to be limited by the credit rating of their country”. With appropriate due diligence, he says, the portfolio can search out lending opportunities that are effectively investment grade, particularly given that they are usually backed by real assets such as land or machinery.
Although debt financing can reach investment opportunities that may not make it to the equity market, not all investors are comfortable yet with the idea of private sector debt in emerging markets. Greater transparency and liquidity should be found in listed equities.
Mr Oberbannscheidt is still convinced publicly listed shares are the best way for investors to participate in both the investment opportunity and the solution to the problem. “We need to improve efficiency in the whole value chain,” he says. “For that to happen, you need to invest in equities.”A stumbling block is that equity investors rarely have a sufficiently long time horizon for efficient investment in the sector.
While his fund urges investors only to participate if they have a three to five-year time horizon, Mr Oberbannscheidt confides the lower limit is a concession to investors’ short-term bias. “Investors are struggling to extend their horizons to three years,” he says, even though many of the developments his investee companies depend on, such as new seed technologies or new potash mines, will take longer to become profitable.
