Global food insecurity and agriculture investment

Agriculture as an asset class is proving remarkably resilient amid the global food crisis that followed Russia’s invasion of Ukraine in February 2022.

Over the past two decades, Ukraine grew to become one of the world’s leading exporters of cereals, oilseed and vegetable oils. But the war, combined with soaring inflation, rising interest rates and geopolitical uncertainty created well-documented disruptions in the food supply chain.

Ironically, this has been to the benefit of the agriculture sector. Restricted and uncertain supply has resulted in higher food prices, putting pressure on the end consumer. But, for the time being, this challenging environment is working out well for farmers and investors in the asset class.

James Govan, co-manager of Barings global agricultural fund, reckons it will take at least two bumper harvests before prices stabilise. “We think pricing is likely to remain high for at least the next two years, and this helps farmers’ profitability,” he says. 

In the US, farmer profitability was at its highest level in 2022 on an inflation-adjusted basis since records began in 1929, according to US Department of Agriculture data. “We’re in a period of high farmer profitability, which is driving demand for a number of different sectors which we invest in, like machinery, fertilisers, protection – and the farmer is incentivised to maximise production, so it sets up a good environment for agriculture,” Govan says.

Elizabeth O’Leary, head of agriculture and natural assets at Macquarie Asset Management, says demand for agriculture assets is strong as they provide a hedge against economic uncertainty. “Agriculture is typically considered as an alternative asset class and can provide investors with diversification in their portfolio, as it has a low correlation to the economic return of other asset classes, equities and bonds,” she says. 

“Be it the dot-com bubble, the global financial crisis or COVID-19, it has historically been a positive contribution to portfolio returns across many periods of economic disruption.”

According to Martin Davies, global head of Nuveen Natural Capital: “Our typical investor profile today is very different to what it was 15 years ago. We’re really focusing on investors who’ve never looked at the asset class previously.

“In a very inflationary environment and when fixed income and equities have taken a bit of a beating over the last 12 months or so, it’s a natural place to look at as a safe haven, to preserve value and to provide resilience in what you’ve bought.”

Jamie Shen, CIO of PGIM’s agricultural investments team, sounds a note of caution regarding the recent rising costs associated with farming. In particular, animal feed, fertiliser and soaring energy prices have affected input costs.

“When you are looking at managing your costs, sometimes you must make tough decisions, but if you manage the costs too much then you’re going to impact your yields or your growth. So it’s a balance and you have to figure out what costs you can manage and those that you shouldn’t try to manage,” Shen says.  

“We take a longer-term perspective where we don’t think about what’s happening in the next 12 months. We think about what’s happening in the next 10 years.”

The big talking points looking to the future focus on sustainability, climate change, and technology. O’Leary says: “Pension funds and insurance companies are seeking stable cashflows that match their long-dated liabilities. The way we consistently deliver that in agriculture is by building resilient farming operations and by driving efficiencies in the way we work. That is where sustainability really comes into play, helping us to lower our costs and maximise productivity across our operating companies in Australia and Brazil. It also offers an important lens through which we can identify and manage risk.”

The big question is how the agriculture sector grows sufficient food to feed a relentlessly growing global population. “The task of doubling production outcomes over the coming decades while driving sustainability, will present opportunities and needs across both emerging and developed markets,” O’Leary says.

Davies agrees: “One of the things we do need to focus on is the sustainability of production.”

The Intergovernmental Panel on Climate Change (IPCC), in its special report on climate change and land in 2019, estimated that “agriculture is directly responsible for up to 8.5% of all greenhouse gas emissions with a further 14.5% coming from land use change (mainly deforestation in the developing world to clear land for food production)”.

Davies continues: “So we have to improve the carbon efficiency of food production and the only way that’s going to happen is by capital coming into the sector.”

Billions of dollars are needed annually to tackle the decarbonisation of agriculture needs. “A lot of that capital should come from the world of investment,” says Davies. “It’s an obvious place from the return-characteristic perspective, but also because it’s desperately needed to flow into the sector as well. I don’t see it diminishing or going away. If anything, I think interest in the sector will increase.”

But the investment will need to flow into both agriculture and forestry funds. “Farmland hasn’t got nearly the capacity as timberland does. But it does have the capacity to take carbon dioxide out of the atmosphere and for the carbon to then be stored in the soil. Improving biodiversity, by investing in sustainable agricultural production will also help.” 

Davies also points to the emergence of Article 9 funds. He says: “The taxonomy is driving European investors to look at impact around what they do, so sustainable finance disclosure regulation, Article 9 funds, investing with an impact lens to deliver sustainable food production systems is an integral part of a lot of people’s thinking in how they invest today.”

For those already investing in agricultural assets, technology is going to play an increasingly crucial role in achieving sustainability targets, reducing carbon emissions, increasing food production yields – and attracting institutional investors who may have been wary of the sector previously.

Shen says: “One of the ways we’re going to continue to see opportunities and improvement in agriculture is through technology and advancements through automation. We believe that institutional investors are very well positioned in that regard, because they have the capital to be able to make the capital investments into technologies into automation, which will, in the long run, improve your cost management.” 

Investors and managers agree that agriculture is well placed to benefit from the continuation of automation and technology, technological advancements in the space, and machine learning – all of which will help improve sustainability and identify those parts of the planet most likely to benefit, and struggle, until climate change can be brought under control.

Davies points out that there are significant hurdles to overcome, but he is confident that human beings have the ingenuity to succeed. “We don’t understand fully yet what, say, a two-degree rise in average temperatures will do from a pest and disease perspective,” he says. “We know what crops require in the way of water, and there are various genetics advances that will help offset rising temperatures, but I do feel that we have the tools available to us to help us deal with [pests and disease].”

O’Leary remains positive about agriculture as an asset class – and its ability to attract institutional investors. “We are very excited about agriculture’s potential to play positively into both climate and biodiversity action,” she says.

“The industry has a great track record of adopting technology and evolving production methods, and what we have found by mapping the size and source of our operating businesses’ carbon footprint over the last couple of years is that, be it through immediate actions we can take to reduce our impact or implementing new technology, many of the solutions are also productivity enhancing.”