Starting with the premise that people have to eat, The Agletter Editor Tom Wallace has found productive fields in the many subsectors of the ag investment space. Without discounting the risks, he explains to The Energy Report how investors can recognize and hedge those risks. Wallace also names three favorite companies that span the spectrum, from planting the seed to foodstuff.
Source: The Agletter
The Energy Report: Is investing in agriculture like investing in any other commodity, or do investors new to the space need to get familiar with special considerations?
Tom Wallace: Agricultural investment is composed of a multitude of subsectors, so when it comes to making an investment decision, investors need to focus their efforts. Agricultural investment encompasses everything from a sheep and beef farm in New Zealand to a phosphate mine in Brazil. We're talking about very different operations that come under the same banner of agriculture, but some cross into other sectors. Obviously, fertilizer is directly related to agriculture, but a phosphate mine, for example, is part of the mining sector as well. You have those considerations to take into account.
The fundamentals that support growth in agricultural commodities are different from those of other commodities for a number of reasons, the main one being that people have to eat. You don't need gold bullion. It's great to have some to protect yourself from the actions of central bankers, but you don't need gold to live. Everybody needs agriculture, so agriculture tends not to correlate with other assets like stocks or bonds. Those considerations are important.
Source: The Agletter
TER: What risks are inherent in agriculture investing?
TW: After we first acknowledge that the two greatest risks to investors are 1) their own herdlike actions and 2) the actions of government, we have systemic risk. That incorporates wild cards like weather, and disasters like a plague. Given that the majority of the world's agriculture is conducted by small farmers, these risks have far-reaching consequences.
We also have market risk, especially in emerging countries. We have the cyclical and seasonal price fluctuations of agricultural products, and government meddling with import and export restrictions. A current example of that would be the ludicrous sanctions that Western governments like Australia's have imposed upon Russia.
We also have exchange controls and subsidies. A perfect example of the failure of subsidies would be the current water situation in California. Farmers have had access to essentially free water for quite some time, and as a result, they developed ridiculous habits of growing crops like almonds, which are extremely water-intensive, in a desert. Problems like that can be solved very quickly if the government gets out of the way and lets the market solve them.
You also have credit risk. Farmers and agricultural companies take on huge amounts of debt, but agricultural capital revolves fairly slowly. We're talking about one or two crops a year. So a disaster or some sort of weather event can spell failure for farmers. In developing nations, land rights and boundaries can be a problem, especially when it comes to pledging collateral for a loan.
Finally, political risk is always inherent because government is essentially violence and coercion. People only need to go and ask a Zimbabwean farmer about political risk. It's definitely something investors need to be mindful of.
TER: How do investors hedge these risks?
TW: The risks might make investing in agriculture sound like holding an Easter egg hunt in a minefield. But you can protect yourself relatively easily through diversification by location and by subsector. When it comes to agriculture, definitely don't put all your eggs in one basket. If you're buying farmland, for example, don't just buy in one location. Do some research and find out where land is still reasonably priced, because many markets have experienced dramatic valuation increases in agricultural land in the recent past.
