x Abu Dhabi, UAETuesday 23 January 2018

Reaping rewards is not easy

Investors increasingly see food as a separate asset class to own.

Investors do not have to wade into the pit at the Chicago Mercantile Exchange to get exposure to rising food prices.
Investors do not have to wade into the pit at the Chicago Mercantile Exchange to get exposure to rising food prices.

Investors are increasingly thinking about food. Not the best place to enjoy a steak or how to match the exploits of the stars of Top Chef, but how to gain exposure to an increasingly popular investment.

The theory goes that the world's population is growing rapidly, and as each new person needs to be fed so the value of commodities will go up, along with those companies involved in the food chain. Rising food prices are hitting every wallet and purse, and many investors are looking for ways to capitalise on this trend, but advisers say that is more complicated than it seems.

"The long-term story is that the global population is increasing and people will need to eat," says Sean Kelleher, the chief executive of Mondial Financial Partners in Dubai. "But how investors best exploit that theme is not always clear."

Retail investors can gain exposure to agriculture and food directly through commodities, such as wheat, sugar and coffee, or by investing in land. Listed companies involved in the production of food, in seeding or in food chemicals, are another option. Meanwhile, there are a number of actively managed funds and exchange-traded funds that track the price of certain commodities.

Nicholas Lodge, the managing partner of Clarity, a newly established financial and agriculture consultancy in Abu Dhabi, believes every investor should ensure that agriculture is part of their diversified portfolio. "As a sector, agriculture and food is something people are either becoming aware of, are already aware of, or are taking advantage of," Mr Lodge says. "Our view is that demand is going to outstrip supply in the long run and that can only lead to one thing - prices trending upwards."

The facts certainly tally with Mr Lodge's prediction. World agriculture area per person is set to fall 28 per cent by 2045, according to the Food and Agriculture Organisation. There already has been a 43 per cent drop since 1965, but the yield from wheat in India and corn and rice in China has increased. So although land has become more scarce, the amount of food farmed from that land has increased.

Until recently, food prices had not experienced dramatic long-term rises. But they could continue to increase because the yield on land is now predicted to plateau as the area per person decreases. China and India's insatiable growth is also set to continue.

Yet gaining direct exposure to rising commodity prices can be hard. Investors have to buy an asset called a future, a contract between two parties to buy or sell a commodity at a future date on a price agreed today. The future contract is for a relatively short period, such as three months, and tends to be rolled over so buyers do not have to receive the physical commodity.

"Despite the predicted growth for agriculture, the important point to note for investors is that just because it's a long-term theme doesn't mean that your asset will go up," says Mr Kelleher. "You can't think of commodities in a buy-and-hold way as you can for equities."

Advisers say retail investors should consult a broker or qualified financial adviser to ensure they understand the trade before diving into commodities.

Investors should also understand the tracking process if the investment is an exchange-traded fund, says Mr Kelleher. "An ETF manager does not want to own the underlying commodity so it's often not an efficient form of tracking a commodity's price," he says.

Buying into agriculture companies could be the solution, but these also are at subject to the vagaries of the market.