The Conversation (2)
The Commodity Investor discusses how to break into investing in agriculture.
By Amine Bouchentouf — Exclusive to Resource Investing News
Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.
Agriculture is one of the most overlooked segments of the commodities industrial complex, yet it is also one of the most important. In terms of both media attention and investor attention, agriculture always seems to take a backseat to energy and metallurgical investments. Most media headlines usually cover the price of gasoline or the current price of gold; very rarely is the price of soybeans or corn covered by the general media.
Furthermore, metal and energy investments get much more investor attention and capital than their agricultural counterparts. For example, there is more than $100 billion in assets tracking gold ETFs compared to less than $20 billion in assets tracking all agricultural commodity ETFs, which include soybeans, corn, and wheat ETFs. Even when agricultural basket ETFs are added in, such as the PowerShares DB Agriculture Fund (ARCA:DBA), that number doesn’t even come close to the gold ETF.
However, agriculture is beginning to garner more attention and is generating strong interest from the investment community and the media. Recently, the United Nations officially announced that the world’s population has reached seven billion. That’s a lot of mouths to feed. As a result of this population explosion, investors are beginning to take notice of the potential financial returns that agriculture can offer. This is a big reason why a large number of investors are trying to determine the best way to include agriculture in their portfolios.
In this week’s column, I’d like give a broad overview of the agricultural industry and determine the best way to get exposure to this growing and important segment of the market.
Agriculture: the final frontier?
There are several reasons that agriculture has not been at the forefront of the investment landscape. First, agriculture is an illiquid investment. Prior to the financial engineering revolution (which included the introduction of ETFs and other easily marketable securities), most investors who were seeking exposure to agriculture had to physically own a farm and manage the daily operations related to running a farm. This was not very attractive to global investors who value liquidity and ease of investment.
Second, agriculture is a fragmented industry with lots of moving variables and varying growth conditions. For example, cocoa farms in Eastern Africa have nothing to do with coffee farms in Southern Brazil. Therefore, there isn’t a uniform vehicle to invest in that can capture the full spectrum of agriculture’s potential. For these reasons, agricultural has never really caught on among mainstream and traditional investors.
However, because of fundamental supply and demand imbalances in the world, returns in agricultural commodities have been some of the best performers when compared to other traditional asset classes. High population growth, industrialization, urbanization, and rising incomes around the world – especially in emerging market regions such as the Middle East, Southeast Asia, and Latin America – mean that demand for food will remain on an upward trend for years if not decades to come.
No serious investor can afford to neglect this growing and lucrative industry. The trick, however, is to find the best way to get exposure to the complete spectrum of agricultural activity through one commodity.
Fertilizer: the ultimate agricultural commodity
If you’re looking for a one-stop place to get agricultural exposure, then look no further than fertilizer. While every agricultural commodity is different, the one characteristic that the whole industry has in common is fertilizer; it is the lifeblood of the business, and every agricultural commodity needs some type of fertilizer to grow. As such, instead of spending an inordinate amount of time analyzing the supply and demand dynamics of corn, coffee, wheat, soybeans, or orange juice, you can focus your efforts on fertilizer, which will give you exposure to all the aforementioned commodities and more.
The best way to invest in fertilizer is through one of the global publicly-traded fertilizer companies. One company I recommend is PotashCorp (NYSE:POT,TSX:POT), which is one of the leading fertilizer producers in the world. This Canadian company is the world’s largest potash producer and is also one of the world’s top five producers of nitrogen and phosphates. With $3.1 billion in revenue for 2011 and operations on over four continents, PotashCorp is an industry behemoth that any investor seeking agricultural exposure should consider including in their portfolio.
If you’re looking for a more aggressive company in the fertilizer market, then you should take a look at Allana Potash Corp. (TSX:AAA). Allana has several promising exploratory blocks in Ethiopia, which is located in Eastern Africa and near the fertile Nile river basin. Allana has four concessions totaling over 150 square kilometers, so the area under discussion is large. More important is the company’s strategic location in Africa, where it can easily reach several key markets, including Africa, the Middle East, Southeast Asia, and Eastern Europe.
Securities Disclosure: I, Amine Bouchentouf, do not have any positions in the stocks mentioned in this article.