Article: How to invest in the food boom

The chief executive of online groceries business Ocado (OCDO) has warned of significant increases in food prices as the plunging pound pushes up the cost of importing fresh produce from overseas.

Although we may all see a hit in our weekly supermarket bill, investors can also gain exposure to the agricultural markets with many so-called soft commodities shrugging off the initial impact from Brexit. The best route into these markets for retail punters is through exchange-traded funds (ETFs) and exchange-traded commodities (ETCs).

Arable pressure

Global food demand is continuing to grow as world population expands and a shift in eating habits in emerging markets put increasing pressure on a finite store of arable land.

Adverse weather conditions have provided support to grain prices in 2016. Prices rise when there is a threat to supply. They tend to fall when the market deems there to be plentiful supply.

The UN-produced FAO Food Price Index of 55 different foodstuffs rose in June 2016 for the fifth consecutive month and saw the largest monthly increase in four years.

Soft commodity markets are distinct from energy and metals because they tend to be impacted by weather conditions in the main growing areas.

A lot of attention is directed towards the competing La Niña and El Niño phenomena. The former is caused by a fall in water temperature in the tropical Pacific and the latter by increasing heat in the same waters. Both have the capacity to alter rainfall and temperature patterns across many of the globe’s food producing regions.

While natural resources such as coal, oil and copper can be extracted in most weather conditions, soft commodities cannot. Heavy rains or prolonged drought can ruin a crop while an extended spell of more temperate weather can lead to bumper stocks.

El Niño is just coming to an end having caused droughts which the UN says could make 60 million ‘food insecure’ and forecasters see little let up with La Niña following on its coat tails.

(Click on chart to enlarge)

ETFs chart

Defensive qualities

Over time agriculture should enjoy defensive qualities. Demand for food is inelastic and consumers are likely to prioritise eating comfortably over luxuries such as cars, expensive clothes and holidays. The returns from these markets are also uncorrelated with equity markets, providing useful diversification to an investment portfolio.

ETF Securities provides the greatest breadth and precision of exposure to soft commodities for UK investors. It offers individual ETCs covering everything from corn, cocoa to lean hogs.

For those unwilling to face the volatility associated with individual agricultural markets, it is possible to gain broad-based exposure through ETFS Agriculture (AIGA) which tracks a basket of agriculture commodity futures contracts. The instrument has a total expense ratio (TER) of 0.49% and uses swap or synthetic replication to achieve the performance of its index.

ETF Securities also offers an exchange-traded fund which allows investors to take a ‘picks and shovels’ approach to the agriculture space by tracking the shares of companies which provide the technology, equipment and materials used to protect, produce and harvest crops. ETFS S-Network Global Agri Business (AGRP) has a TER of 0.65% and also uses synthetic replication.

Top constituents include Swiss agrochemicals and seeds producer Syngenta (SYNN:VTX), controversial genetically modified (GM) food pioneer Monsanto (MON:NYSE) and US tractor maker Deere & Co (DE:NYSE).

A more tangential way into this theme is offered by db X-trackers MSCI EM Consumer Staples (XECS) which has a TER of 0.65% and provides exposure to a basket of emerging markets in the consumer staples sector, which in addition to household and personal products provides exposure to food and food retail. Its price is up more than 11% so far in 2016.