Food preferences are changing too. As individuals get wealthier, their eating habits tend to change, with meat and protein consumption often rising very sharply. This is exactly what is happening in the large emerging markets of India and China, where demand for meats such as chicken and pork is growing. Since grain feedstock is a major input for meat production, we believe that changing dietary habits will exert continued upward pressure on grain prices.
Well-supported commodity prices have also improved farming economics and provided a strong incentive for farmers to maximise output. We believe that this will continue to have positive implications on a number of subsectors such as agrochemicals, agricultural machinery and grain handling and processing services.
Agribusiness, as it is known, encompasses a broad investment universe of companies engaged in feeding the world. It ranges from the supply of fertilisers and agrichemicals used to increase yields at one end of the spectrum, through farming, fishing and the logistical infrastructure needed for delivery, to distributors, processors and marketeers at the other.
Over the long term, we maintain our core view that significant investment in agriculture, both in terms of land and agricultural goods and services, is required to meet the rising demand for food. The only way that this can be achieved is through higher soft commodity and land prices.
At the same time, we are also seeing rising interest in alternative energy sources such as biofuels, where agricultural products are the main inputs. In this area of the market, we expect demand to be well supported by a combination of high oil prices and regulatory incentives as national governments continue to introduce subsidies and output targets.
While there are plenty of investment opportunities in the developed Western markets, many attractive ideas can also be found in developing economies. In Asia, the emphasis tends to be on companies meeting domestic demand from the growing middle classes, while Latin America has significant potential to develop as a major food exporting region.
It is important to recognise that agriculture-related equities can be adversely affected by natural events such as drought and unseasonal rain, while the price of underlying soft commodities can also fluctuate due to, for example, changing market supply and demand relationships. However, we view the investment case for the agriculture sector as attractive in the long term, driven by sustainable global demand on the one side and instability and inadequacy of supply on the other.
With strong grain prices also improving the shorter-term fundamentals, the business of feeding the world merits consideration for any well-diversified, long-term investment portfolio.
