Getting a better yield from crops by Harsha Jethnani

If you're looking to invest in commodities, then stocking up on gold or silver are not the only options.

What you usually find in refrigerators or supermarkets can also be stocked in your investment portfolio.

Investors looking to take on a healthier spin can consider putting money into things like sugar, wheat, corn or soya bean, just to name a few.
Termed soft commodities, these mainly refer to agricultural produce that is grown rather than mined from the ground.

Investors keen on the sector can consider investing in companies that operate in the agribusiness sector, market experts told The Sunday Times.
Direct exposure to soft commodities via futures or a price index can be relatively risky as prices of these underlying commodities tend to be quite volatile.

Going by the last five years or so, returns from agribusiness companies have also been higher than returns from investing in commodities directly.
From June 2005, the DAX Agribusiness Index - which invests in 40 of the world's largest agricultural companies - has generated returns of more than 165 per cent till the end of last year.

This is higher than the 33 per cent return from the Rogers International Commodity Index over the same time period.

Total returns of the index are based on a basket of 22 agricultural commodities futures contracts.

The equities, or companies, 'get the benefit of the productive growth in the agribusiness industry, they benefit from volume as well as price, and volume is actually more important than price', said Ms Skye Macpherson, co-portfolio manager of an agribusiness fund at First State Investments.

Agriculture is quite a large fixed-cost business, she said, and that means any increase in production from an existing asset base contributes directly to the bottom line or profits of a company.

The growth story for agriculture is one that is long term and more dependent on higher production volumes as opposed to price, market experts say.
Demand is expected to soar in the next few decades and supply will likely struggle to catch up.

By 2050, global food demand is expected to rise by 70 per cent, according to the United Nations' Food and Agriculture Organisation (FAO).

The increased pace in demand will move in line with growing population numbers, changing dietary preferences and the development of more uses for existing crop products, the FAO has said.

Population numbers will increase, especially in emerging economies such as China, India and Latin America.

And as people in these economies become more affluent, their dietary requirements will include more protein, which in turn drums up demand for grains, said Mr Renzo Casarotto, senior portfolio manager at First State Investments.

Grains serve as feed for protein producers.

Mr Casarotto told The Sunday Times that about 80 per cent of the additional food production required would have to rely on improved yields.
Only about 20 per cent to 25 per cent would come from new farmland as it is relatively scarce.

Other than limited farmland, factors such as climate change, erratic weather patterns, natural disasters and possibly protectionism tendencies by governments are likely to keep supply at tight levels.

For Singapore investors, funds offering exposure to stocks in agribusiness are limited in number.

These include First State Investments' Global Agribusiness Fund and the DWS Global Agribusiness Fund. DWS Investments is the mutual fund arm of Deutsche Asset Management.

The funds are available to investors at a minimum investment amount of $1,000. The DWS fund also accepts US$1,000 (S$1,250) or 1,000 euros (S$1,800) as minimum initial investment to its fund.

Both funds invest in upstream companies - those involved at the planting or sowing stage - as well as midstream and downstream companies, which sell food products to end consumers.

First State's fund is also substantially invested in forestry and timber. The DWS fund also has holdings in diversified banks, restaurants, and marine ports and services.

While prices of soft commodities have rallied since May last year, head of retail at DWS Singapore, Mr Andrew Kwek, said they are expected to 'come off from their current levels'.

Over the past year, prices of commodities like corn and soya beans, for instance, have risen by 100 per cent and 50 per cent, respectively. Global wheat prices have also hit record highs.
Still, the 'surge in commodity prices to historic highs is unlikely to be sustainable, even though the long-term food price trends are pointing upwards', said Mr Kwek.

As a result, the DWS fund has begun shifting focus to downstream companies as lower prices of crops or inputs will help such companies improve margins.
Diversifying within the fund balances the fund as it anticipates business and market cycles, added Mr Kwek.

What is extremely important to remember about this sector is that it is 'not suitable for short-term views', said Fundsupermart general manager Wong Sui Jau.
The drivers are long term in nature and in the short term, things like weather patterns, including storms or droughts, will have a bigger impact on prices and agribusinesses than these long-term factors.

'The long-term factors may still be in place, but it doesn't mean agribusiness funds will only go up. Investors may need to be very patient,' said Mr Wong.

http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={621391662-8703-6890985368}

harshamj@sph.com.sg