'Returns definitely there' for ag investors, World Bank expert says


Money may grow on trees after all.

At least, to judge by the change in investor thinking towards agriculture noted by Marc Sadler, adviser on risk and markets to the World Bank's agriculture global practice.

Five years ago or so, investors who sought his expertise at get-togethers with the private sector were often of the farming-versus-other-asset-classes type , "asking very, very general questions about agriculture", Mr Sadler says.

"But since then there has been a change in perception about agriculture."

Now the people approaching him are often large-scale asset managers, or equity analysts, often posing detailed and long-term questions.

"People are becoming far more sophisticated," he tells Agrimoney.com.

Fund retreat

Which may be just as well, given that many of the headline arguments for broad investment in the sector have weakened.

Land values, for instance, are on the slide in many countries, while grain prices are near multi-year lows in futures markets such as Chicago, the world's benchmark.

Hedge funds this month returned to a net short position in the top US-traded agricultural commodities (ie short bets exceeding long holdings) for only the fourth stint on records going back to 2006.

Indeed, they have undertaken their second longest selldown in ags on record.

'Returns are definitely there'

Yet simple maths indicates that there is money to be made in food, Mr Sadler says, quoting an estimate from KPMG that the sector is worth $5,500bn at the retail level.

"Now if you add up subsidised investment in agriculture, that represents only about $500bn.

"If everyone was losing money, we would be looking at far bigger subsidies. But we are not.

"The returns are definitely there."

'Put the pieces together…'

That is even true at current crop prices, which are for the main grains well below highs reached at the end of the last decade, when squeezed inventories, and in some markets (notably rice) government protection measures, sent values of many to record highs.

"Prices are still higher than before 2007-08, still higher than long-term averages," Mr Sadler says.

And the theme is still live, even when world stocks of major grains are at ample levels, of agriculture needing to up its game to cope with the demand stemming from growth the world's population and, overall, affluence.

"The world population took centuries to get where it is now. By 2050, we will have 9bn people. We will add another 30% of our population in just a few decades.

"Put the pieces together, the expanded population, expanded wealth, and the finite supply – the certain amount of land, certain amount of water – and you can see why the investment community is looking at agriculture and the food system in a different way."

'Vast responsibility'

Food, of course, is only part of the story, with agriculture also looked on to supply other goods, such as fibres, in which Mr Sadler himself has first-hand experience, having worked as a cotton trader for a major global house for nine years, during a 15-year stint in Central Asia.

"Agriculture has a vast responsibility for meeting the needs of human consumption.

"Food is one piece of that.

"There is the demand for biofuel, but also for fibre. Still to this day, consumers have a specific preference for natural fibres over man-made fibres."

Climate is changing

Agriculture is attempting to meet this demand at a time of climatic change too, which Mr Sadler underlines as a challenge for the sector, despite the series of bumper world grains harvests.

"One of the great parts of my job is that I get to speak to farmers all over the world. And all of them relate stories about how things are fundamentally different for them than when they started farming, their parents started farming.

"They say how seasons have moved, temperatures increases, rain patterns have changed."

While they may not talk about the kind of weather extremes which make headlines, "climate shifts are important as well as the shocks," says Mr Sadler, who is also global lead for the World Bank's climate smart agriculture scheme.

"If you are farming in Kenya, and the rain pattern moves 10, 14 days, if you stick by the planting dates your parents and grandparents followed, you will have a crop that does not get rain at the right time."

Canada warm

On a larger scale, he sees the Central America's 2013 outbreak of coffee rust, which sent production sharply lower in the likes of Nicaragua and Honduras, as down to climatic factors.

"It rained for a bit longer than usual, temperatures were a little bit warmer than usual. It turned out to be the perfect conditions for a latent disease that had spread to Central America to start becoming active."

Not that all the impacts of global warming will be negative, in agricultural terms.

"Some places are going to benefit. In Canada, Ottawa is now producing grapes for making wine.

"And Canada has become the biggest exporter to India of pulses – crops that the country could never have grown historically."

'The water will run out'

And pressed again about the succession of strong US harvests - since the 2012 yield collapse which Mr Sadler attributes more to consistent warmth, including at nights, than the higher-profile drought – he raises a big hurdle to its sustainability.

"In the southern US, farmers are using underground water to irrigate crops. There is increase use of sprinkler systems for irrigations, using water which will not be replenished.

"Ultimately, the water will run out.

"What we see today is not necessarily the position we will be in tomorrow."

Bullets vs buckshot

Which brings us back to the need for investment in the sector, to fund the growth in agricultural output required to meet growing demand, at a time when climate change is complicating the picture.

Is there an area of agricultural investment which Mr Sadler believes is particularly promising?

"We are not in a game of silver bullets. We are in the game of silver buckshot he says.

"There is not one thing we are going to do and problems will be solved."

While meeting demand requirements is "definitely achievable, it is going to take concerted action – not a silo approach".


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