2. 2
DISCLAIMER
This document does not constitute financial product advice and should not be relied upon as such. The information in this document is for discussion purposes
only and is not an offer or solicitation to purchase or sell any securities or financial product. None of the information in this document takes into account
any person’s personal objectives, financial situation or needs and you must determine whether the information is appropriate in terms of your particular
circumstances. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
The information contained in this document is strictly confidential. If you are not the intended recipient, you may not disclose or use the information in this
document in any way. No liability is accepted for any unauthorised use of the information contained in this document.
This document is not to be distributed to any person or corporation by the recipient. Macquarie Group Limited is the owner of the copyright material in this
document unless otherwise specified. Macquarie Group Limited and its worldwide affiliates and subsidiaries accept no liability whatsoever for any direct,
indirect, consequential or other loss arising from any use of this document and/or further communication in relation to this document.
This document has been prepared based on information believed to be accurate at the time of the preparation of this document. Subsequent changes in
circumstances may occur at any time and may impact the accuracy of the information in this document. Some of the information in this document and the
figures that have been quoted, and or used within it, have yet to be confirmed and finalised and consent has not been obtained from all relevant stakeholders.
It is important to note that to this extent the document may not be accurate or complete and some of the information could be subject to amendments.
Any forecasts contained in this document are predictive in character and therefore no undue reliance should be placed on the forecast information. Whilst
every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect
assumptions or by known or unknown risks and uncertainties. The actual results may differ substantially from the forecasts and some facts and opinions may
change without notice on the basis of changing market conditions.
Past performance is no indication of future performance.
Other than Macquarie Bank Limited ABN 46 008 583 542 (MBL), no Macquarie Group entity mentioned in this document is an authorised deposit-taking institution
for the purposes of the Banking Act 1959 (Cth) and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide
assurance in respect of the obligations of the Macquarie Group entities mentioned in this document.
3. 1
Contents
Executive Summary 02
Demand factors driving the asset class 04
Supply constraintsdriving the asset class 08
Portfolio benefits of investing in agriculture 14
Mitigating Agricultural Risks 16
Portfolio benefits of investing in agriculture 18
How to derive returns from agriculture 18
Agricultural Exposure – how to invest 19
Portfolio benefits of investing in agriculture 20
Conclusion 21
Footnotes 22
4. 2
Executive Summary
Executive Summary
Developing economies
The rapid industrialisation and urbanisation of
emerging market countries is driving a structural
shift in agricultural markets. The economic growth
and urbanisation of Brazil, Russia, India and China
(BRIC) is being accompanied by an increase in living
standards and per capita income.
GDP growth
An increase in wealth, in turn, has a direct
correlation with driving food consumption, as
highlighted in the Food and Agriculture Organization
(FAO) chart below, which shows that as GDP
increases so too does the appetite for protein.
Changing dietary patterns
As Gross Domestic Product (GDP) growth and
per capita income increase, so too does the
appetite for protein. In particular, for animal
sourced protein, vegetable oils, sugar enhanced
and processed foods. Developed world amenities
such as refrigeration also become more readily
affordable, meaning that meat can be stored
and eaten over longer periods and consumption
accordingly grows.
Chart 1: GDP and Food Consumption
4,000
Food consumption (?)
GDP per capita (USD/capita)
3,500
3,000
2,500
2,000
1,500
10,000 20,000 30,000 40,000 50,000
Germany
UK
US
Japan
Australia
Brazil
China
India
Argentina
Indonesia
Source: FAOSTAT, IMF1
An increase in meat consumption has a
corresponding effect on the amount of grain
needed to feed livestock, known as the “multiplier
affect”. For example, livestock have an inefficient
energy input to protein output ratio, meaning
that they need to consume approximately seven
kilograms of grain to increase their live body
weight by one kilogram.2 This weight gain ratio
provides another driver of agricultural demand.
A structural shift in commodities, food supply and demand
Global agricultural commodity markets have recently experienced exceptional price volatility,
with record heights achieved in 2008, followed by a recent paring back in the face of the global
financial crisis. The ascension of commodity prices in 2008 however represented the beginning of
an ongoing structural shift, driven by several key themes and long term demand factors that will
continue to place pressure on food supply. It is these factors that will ensure that food security
remains high on national agendas in the future.
5. 3
Population growth
The size of the populations in countries such as
China and India mean that these structural trends
amplify many times over the demand placed on
agricultural production.
Limited arable land and water
There is a diminishing amount of arable land
available or viable for farming. Urban and
population sprawl are rendering large tracts of
land either unavailable for agricultural use, or
untenable due to land degradation.
Due to mounting pressures on the arable land
that is available for farming, and demand for
food, productivity gains will need to be made.
Few technological leaps forward
In the past, agriculture benefitted from a
significant and co-ordinated global effort into
agricultural and scientific advancements, that
came to known as the “Green Revolution.”
The scientific and ecological leap forwards that
resulted from this effort took place in the mid-
twentieth century and saw investments and
research efforts into new and more resistant crop
varieties drive yields to record heights. But, the
leaps forward in scientific advancements are now
behind us.
Little investment, slowing harvest yields
Comparatively, agricultural advancement has won
little attention or precedence on the world stage
or on national agendas since the inception of the
Green Revolution. Consequently, after decades
of steadily increasing tonnage per acre, harvest
yields are now growing at only 1.3 percent per
year, barely half the rate of thirty years ago.3
Mounting demand and constrained supply factors
are the results of longer term trends in agriculture.
In addition, they present some of the major
reasons as to why investment into food security
is now high on every national agenda. Finally,
shorter term cyclical factors have also played
their part in driving up prices through 2008 and in
causing a critical supply and demand gap.
6. 4
Urbanisation
The growing global population is on the move.
Increasingly, people are treading the well worn
path from rural to urban areas in search of work,
improvements of living standards and in some
cases, education. In the Asia-Pacific region
alone, it is estimated that nearly 600 million
people will move from rural areas to cities by
20207 and by 2030, the number of people living
in cities is forecast to grow by an additional 343
million people (equivalent to 60% of the world’s
population, up from around half currently.)8
This country to city migration has a well
documented link to economic growth, but also,
its impact can be felt on global food demand.
As people gain access to a broader job market,
their employment prospects increase. With work,
comes higher disposable incomes and consumer
spending power and on offer are a wider variety
of food products, with a higher proportion of
processed foods, and in greater quantity.
Chart 3: Growing Urban Population
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
10,000
Millions
■ Rural population ■ Urban population
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Source: UN Secretariat9
Changing dietary patterns
In line with an increase in personal wealth,
consumers will typically trade up from lower-
value foods, such as staple grains, for higher
value foods. The proportion of fats and sugars
in diets should also rise. Moreover, an increase
in personal wealth will support a substantial
The structural change in commodity and food
demand is predominantly being driven by the
following factors:
global population growth;■■
urbanisation■■
changing dietary patterns;■■
diversion of output to biofuels;■■
Global population growth
Most notably, the demand for food is being
driven by the growth in the global population. The
World’s population is projected to grow from its
current base of 6.1 billion people, to 8.3 billion by
2030 and 9.3 billion by 2050.4 At current growth
rates, that means there will an additional 79
million mouths to feed each year.5 Such forecasts
present an indisputable dilemma: how to feed the
mounting numbers?
Chart 2: Global Population chart
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
10,000
Millions
■ More developed regions ■ Less developed regions
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Source: UN Secretariat6
In addition, there is also an en masse change at
play in the living standards and diets of a vast
number of people, due to the urbanisation and
industrialisation of developing countries.
Demand factors driving
the asset class
7. 5
increase in the demand for meat, eggs, fish, dairy
products, fruits, vegetables and processed foods.
As personal wealth grows, fresh food storage in
the form of refrigeration becomes affordable so
meat consumption becomes practical and will
only increase.
Finally, a large proportion of the population in the
rapidly urbanizing and developing economies
is young, and as this collective increasingly
embraces Western eating habits, demand for
higher-value food products, rich in protein and
sugar, looks set to intensify.
Chart 4: Global Consumption Chart
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
2009
2001
2003
2005
2007
2009
1,800
Million tonnes
■ Corn ■ Wheat ■ Soybean
1,600
1,400
1,200
1,000
800
600
400
200
0
Source: Macquarie, USDA10
This list of factors supporting the increasing
demand for protein rich foods will also trigger a
‘multiplier effect’ on grain consumption. As meat
increasingly becomes the food of choice, for more
and more people, more livestock will need to be
bred. And, cattle, poultry, sheep and even fish are
reared to a large degree in confinement systems
where they are fed grains. Substantial future gains
in beef, chicken and pig production are most likely
to come from these intensive production systems,
as arable land for farming is diminishing. In turn,
demand for grains, used in the rearing and fattening
of animals in confinement production systems will
increase. Beef production in particular will enhance
demand for grains, as it requires nearly twice as
much grain as pork and nearly four times as much
grain as poultry. It takes 7 kilograms of grain to
produce one kilogram of beef: the conversion is
4 to 1 for pork and 2 to 1 for chicken.11
Diversion of output to Biofuels
The growing biofuels market is another factor,
that until recently did not exist, and is joining
population and urbanisation trends to place a
new level of demand on agricultural commodities.
Historically the main competition for the world’s
staple food, in the form of grains, has been
either feed for livestock and animals, or for
human consumption. But now, the search
for an alternative source of energy is afoot,
and has effectively thrown another competitor
in the queue. At the heart of this change is
the realisation that oil reserves are finite and
controlled by few. Also at play is a race to fuel
the massive and emerging Asia. India and China’s
economies alone are expected to grow by an
average of 6.5% and 9.1% respectively by 2013,
according to the International Monetary Fund12,
as they do so, energy consumption will expand
along with the pressure to find a cleaner, efficient
source of fuel.
A cleaner alternative to gasoline, ethanol
is domestically produced from a range of
agricultural sources including corn, wheat and
sugar, making it a renewable form of energy.
It sits alongside biodiesel as the current,
most accessible alternative fuel, which itself is
manufactured from soybean, canola, sugar and
other oilseed feed stocks and is already in wide
use in domestic cars in Brazil.
After years of complacency, where dependence
on oil was by and large accepted and finite
supplies drilled for and contested, we have
arguably witnessed a shift in thinking.
World fuel ethanol production tripled between
2000 and 2007 and is expected to double again
between now and 2017 to reach 127 billion litres
a year. Biodiesel production is set to expand from
11 billion litres a year in 2007 to around 24 billion
litres by 2017.13
There are currently 41 countries with biofuel
mandates. And the US is one of the nations
leading the charge. The US government’s current
ethanol mandates, outlined in the Renewable Fuel
Standard charter are also set to increase to 11.2
8. 6
supportive to soyoil prices worldwide. In 2009/10
Brazil is expected to export 1.5mt of soyoil,
while it is expected to consume 1.58mt for the
domestic biodiesel industry.19
The growth of ethanol production has also led
to competition between food and fuel, triggering
a more immediate impact on food production,
consumption and prices. In Brazil, for example
that competition was clearly manifested in
sugar prices at the end of 2009 and at the start
of 2010. In January 2010, sugar prices sat at
near 28 year highs leading sugar producers to
shift their mills’ production capacity away from
ethanol, to sugar, triggering a shortage in the
domestic ethanol supply. In turn, ethanol prices in
Brazil increased.20
In Organisation for Economic Co-operation and
Development (OECD) countries, at least, the
growth of biofuel production has thus far been
driven largely by policy measures, and it is not
clear whether the energy security, environmental
and economic objectives of biofuel policies will be
achieved with current production technologies.
Even with the collapse in oil prices at the end
of 2008 (which saw prices of gasoline in the US
fall from a record of $4 in summer to an average
of $1.66 by mid December)21 prices have since
remained at levels higher than historical averages
due in large part to increases in biofuel usage
– a price support that we believe looks likely to
continue, at least in the mid-term.
billion gallons by 2010 and expected to peak by
2015 at 15 billion gallons. Such demand is currently
keeping US corn prices supported as it is the most
positive consumption variable at the moment.14
Of the major factors which impact the profitability
of ethanol production in the US, the prices of oil
and gasoline are the most significant. High oil
prices make ethanol more profitable to blend, and
in 2008 oil prices soared globally to reach heights
of $140 (bbl), providing a strong support, due to
its comparative competitiveness of the cost of
production. At prices of approximately $80/bbl
ethanol profitability continued to remain competitive
and well supported at the end of 2009.15
In addition, the cost of corn, the price of the
by-product (Dried Distillers Grains) as well as
ethanol's supply and demand outlook, all play a
part in its overall profitability.
In only eight years from 2001 to 2009 ethanol’s
share of the total fuel mix grew from 1% to 7%16
primarily through strong government support for
the industry. Since the USDA’s World Agricultural
Supply and Demand Estimates (WASDE) report
began including corn consumption for ethanol
in 2002 the share of corn devoted to ethanol
production has risen from less than 10% to just
less than 30% projected for the 2009/10 season17.
Therefore ethanol is becoming an ever more
important aspect of US corn demand.
The European Union has a mandatory target of
10% biofuel usage by 2020 as stipulated in the
Renewable Energy Directive (2008) charter. Much
of this may have to be imported from South
America, and in particular from Brazil. While its
biofuel market is not as developed as the US, EU
Member countries must submit a "Renewable
Energy Action Plan" by June 2010 and some
member countries that have not had mandates
may fall in line with the ambitions of countries
such as France and Germany.
Brazil is the second largest producer and
consumer of biofuels after the US and is the
world's largest exporter. Brazil has also recently
increased its biodiesel mandates from 4% to 5%,
with a major input being soyoil.18
Consequently, for the first time, Brazil's domestic
consumption of soyoil for biodiesel will match
their export volume of soyoil. This is generally
Demand factors driving
the asset class
10. 8
Supply constraints
driving the asset class
In addition to demand factors, the structural shift
in commodity and food demand is also being
propelled by supply side pressures. They include:
Land scarcity■■
Water scarcity■■
Slowing productivity■■
The unlikelihood of reinventing the■■
“Green Revolution”
Land scarcity
Rapid urbanisation and accompanying land
degradation is rendering an increasing amount
of land untenable for many forms of modern
farming. The controversial subject of climate
change is also a factor, if the world’s thermostat
continues to rise, in turn making farming and high
crop yields increasingly difficult to achieve and or
requiring greater inputs of water.
Out of sync with population growth rates, the
global area dedicated to the production of
key agricultural crops has risen only modestly.
Between 1961 and 2007 arable land grew at an
average annual growth rate of 0.2%.22
Chart 5: Global Harvested Area
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
600,000
‘000hectares
500,000
400,000
300,000
200,000
100,000
0
■ Soybean ■ Corn ■ Wheat ■ Rapseed
Source: USDA (December 2008), Macquarie23
Also concerning, is the fact that cities are often
built on prime farmland, and nutrients are being
transferred from farms to cities with little or no return
flow. Consequently, urban areas have become the
source of sewage flows, run-off and other forms of
waste that become environmental problems, often
affecting surrounding rural areas. Types of land
degradation include chemical contamination, soil
erosion, nutrient depletion and salinity.
The problem continues to spread along with
the urban sprawl, as in the US for example,
where about 400,000 ha of farmland are lost to
urbanization annually. On a greater scale, China
lost about 5 million ha of farmland to urbanization
during the period 1987–92.24
An estimated 23% of all usable land on Earth
(excluding mountains and deserts, for example)
has been affected by degradation to a degree
sufficient to reduce its productivity.25 According to
some estimates, world agricultural output could
decrease by as much as one-sixth by 2020 due
to climate change, which is expected to increase
the risk of droughts and floods and exacerbate
environmental damage leaving large areas of land
unsuitable for crops or grazing.26
Due to these mounting pressures on land
availability, the increased need for food and other
agricultural products must be met by raising and
sustaining crop and livestock yields and by more
intensive land use.27
Water scarcity
Water scarcity is also a major constraint on
agricultural production growth. Similar to the
availability of arable land, the quantity and quality
of global surface and groundwater resources is
being jeopardized by the combined impacts of
population growth and urbanization; rising wealth
and resource consumption; and climate change.
According to UN data, by 2025, 1.8 billion
people will be living in countries or regions with
absolute water scarcity, and two-thirds of the
world population could be under conditions of
water stress – the threshold for meeting the water
requirements for agriculture, industry, domestic
purposes, energy and the environment. In stark
contrast, the UN also estimates that in order
to meet growing food needs agricultural water
usage will need to increase by 50% by 2015, and
double by 2050.28 The implications of this water
requirement gap on farming activities are yet to
be realised, but undoubtedly they will present a
challenge, requiring, new infrastructure investments,
such as water reclamation or desalination.
11. 9
This gap in supply and demand ultimately means that those with access to water and or water
infrastructure may have increasing influence and clout in agricultural production and trade. As such, sound
water management is likely to become an even greater pillar of success and longevity in scale farming.
Chart 6: Water scarcity chart
15
8
6
13
26
8
11
<15
13
36
60
■ Share of available fresh water (%)
■ Share of world population (%)
Source: UNESCO:The United Nations World Water Development Report 1, 2003
Slowing productivity
Due to the limited amount of available arable land, the increased demand for agricultural crops, food
and other agricultural products must be met by increasing yields. The modern dilemma however, is
that just as cultivated area has stagnated, so too has global yield growth.
Chart 7: Global Crop Yields
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
6
tonnes/ha
■ Soybean ■ Corn ■ Wheat ■ Rapseed
5
4
3
2
1
0
Source: Macquarie, USDA (August 2008)29
One answer to the dilemma is the controversial
use of biologically or genetically modified crops,
or in the alternate and equally as divisive, is the
possibility of using greater quantities of pesticides
and fertilisers. Neither option provides the sole
answer and increasing chemical inputs will only
become increasingly costly as input expenses
continue to rise.
Why the demand supply gap is different this
time around
The fact that the world requires more food
and higher yields from existing farmland is
well documented. According to FAO, by
2030 average crop yields must climb from the
current rate of 1.1 tons of grain per acre to
1.5 tons.30
12. 10
The Green Revolution
The Green Revolution refers to united efforts
by scientists and botanists to breed higher
yielding plant varieties specially suited to humid
conditions in the developing world. New varieties
of wheat, corn, and rice were also bred to resist
fungus and insects and could tolerate higher
amounts of nitrogen fertilizer, resulting in higher
global yields and scale crops across formerly
unfarmed areas. Irrigation methods were also
improved and scientific advancements saw new
chemical fertilisers on the market.
In the past, growing demand was met thanks to
a significant and co-ordinated global effort into
agricultural and scientific advancements. In the
wake of the 1930s Great Depression, concerns
mounted over whether there would be enough
grain supplies and food to continue feeding the
population. As a result, there was a combined
focus and funding effort by governments,
private industry and foundations. The associated
transformation of the entire food production
system stemmed from programs of agricultural
research, extension, and infrastructural
development, which were instigated and largely
funded by the Rockefeller and Ford foundations,
among other major agencies. Due to the size of
the enhancements in global grain harvest yields,
and the fact that it enabled grains to be grown in
previously untenable areas, it came to known as
the ‘Green Revolution.’
Countries that were previously food importers
became net exporters. Mexico, previously, a
wheat importer of approximately 50 percent of
its total consumption, was self sufficient by 1956
and by 1964, an exporter of half a million tons
of wheat.31 Similarly, India saw annual wheat
production rise from 10 million tons in the 1960s
to 73 million in 2006.32
These technological advancements allowed the
world to keep pace with worldwide population
growth to date, and it’s widely reckoned that it is
the reason the average person in the developing
world consumes approximately 25% more
calories per day than pre 1945.33
Crop yields exploded, with world grain production
increasing by over 250 percent between 1950
and 1984 resulting in an oversupply of food,
which saw a corresponding fall in the ‘real’ price
of food.34
More recently however, after decades of steadily
increasing tonnage per acre, yields are growing
by 1.3 percent a year, barely half the rate of thirty
years ago and slower than demand is growing.35
In 2006 the FAO Director General Jacques
Diouf called for a second Green Revolution, but
admitted that it may not be so easy to replicate in
today’s environment.
“The task ahead may well prove harder,” he
continued. “We not only need to grow an
extra one billion tonnes of cereals a year by
2050 – within the lifetimes of our children and
grandchildren – but do so from a diminishing
resource base of land and water in many of
the world’s regions, and in an environment
increasingly threatened by global warming and
climate change.”36
Further improvements may require greater use
of biotechnology which faces much opposition,
particularly in Europe.
During the Green Revolution increased
investment in dams, reservoirs, and canals
allowed previously rain-fed land to be irrigated.
Whereas today, climate change, urbanisation
and expansion of industry are making water
increasingly scarce, providing another hurdle that
will have to be overcome if we are to increase the
supply of agricultural commodities.
The higher yielding plant species that were
introduced as a result of the Green Revolution
also required higher usage of hydrocarbon-
based pesticides and fertilisers. As a result,
agriculture became vastly more energy-intensive.
Today, increased use of fertiliser and chemical
is constrained due to rising input costs. At the
same time, we are more environmentally aware
and as a result there is an increased focus on the
need for a ‘greener’ Green Revolution.
Since the 1960’s, there has not been the same
combined effort towards increasing agricultural
productivity. By comparison, relatively few of the
World’s leading foundations have the same sole
focus on revolutionising farming production.
Rich countries, in particular, have had less focus
on agricultural science in recent decades. Since
Supply constraints driving
the asset class
13. 11
Caribbean and Asia. Suddenly by 2008 food
security was high on every national agenda.
Traditional exporters such as China, Brazil,
India, Indonesia, Vietnam, Cambodia and Egypt
reacted by imposing strict export bans on rice.
Elsewhere, countries such as Argentina imposed
high tariffs blocking export of wheat and other
grains, only serving to drive up prices even higher
for net food importers.
Almost just as swiftly, the commodity price bubble
came to an end, with the abrupt slowdown in the
global economy precipitated by the financial crisis.
The dual impact of slowing GDP growth, together
with indications of high harvest yields in some
crops combined to drive prices down. By some
estimates, agricultural commodity prices have
fallen by 16.2% for the year to November 200940.
However, this subsequent fall in commodity
prices has not been as dramatic as its rise. The
prices of many commodities have consolidated
to around 2007 levels. And, the FAO remains
worried that the price hikes of 2008 may yet be
seen again and do not anticipate pre-2006 prices
ever returning.41
Why the short term price volatility?
In the lead up to 2008, long term demand factors
joined a combination of shorter term factors to
create what was a ‘perfect storm’ for agricultural
commodity prices.
Those shorter term factors included:
Market rallies, oil price hikes and a low Dollar■■
Low inventories■■
Government intervention■■
The impact of trading instruments■■
and speculation
Market rallies, Oil price hikes and a low
US Dollar
On the economic side, the commodities
price boom was set against a backdrop of
strong global economic growth, supported by
remarkable financial conditions.
In particular, low interest rates, the depreciating
US Dollar exchange rate and favourable liquidity
conditions all pushed the trajectory of global
stockmarkets. This led to a global stock market
capitalisation new record of close to $60 trillion
the 1980s public investment in farm science
has stalled, with one sample of 21 first world
countries revealing that real public spending on
agricultural research and development reversed
its traditional upward path after the 1980s and
began declining at an annual rate of 0.6% in the
1990s. In his book “Starved for Science” Robert
Paarlberg comments that Increasingly in the US,
spending goes towards downstream processing,
not on farm productivity. Paarlberg adds that in
Europe, the surplus production after the Green
Revolution led to a shift away for public spending
for agricultural science, and in the UK, farm
research began falling at an annual rate of -0.2%
as early as the 1980s.37
It is also highly debatable whether, given the
current global economic conditions, whether
governments in developed countries have the
political will to tackle the issue of food security,
particularly if it is not considered a pressing
issue domestically.
This combination of factors, coupled with the
ongoing demand coming from industrialising
BRIC economies, mean that farmers will struggle
to keep up with increasing demand. For the first
time in decades higher raw material costs for
food manufacturers are being passed on as ‘real’
price increases to consumers.
It is not that the supply cannot be increased,
but there is no immediate short-term solution.
Achieving increases in supply is long-term project
that requires a co-ordinated global effort.
Price volatility – does the story still hold true
post 2008?
Between 2006 and 2008 average world food prices
escalated dramatically. For example, the average
world price for rice rose by 217%, reaching a ten
year high, wheat rose by 136%, corn by 125% and
soybeans by 107%. By late April 2008 rice prices
had more than doubled in just seven months, as
did milk and meat prices, in some countries.38
The impact of this price volatility was felt globally,
creating political and economical instability and
social unrest in both poor and developed nations.
Total food import bills rose by an estimated 25%
for developing countries in 200739, resulting in
protests and riots in Africa, South America, the
14. 12
in 2007, according to the World Federation
of Exchanges.42
Over the twelve months to September 2007,
world stock markets increased in value by 31%,
adding $14 trillion of new stock market wealth to
the world economy in just a year.43
More impressive was the run up in stock market
capitalisation over the five years from 2002 to
2007, which saw almost $40 trillion of stock
market wealth created, as the global market
capitalization rose from about $20 trillion in
September of 2002 to almost $60 trillion in
September 2007.44
During this five year period, more stock market
wealth was created than was created during the
thousands of years it took to create the first $35
trillion of stock market value reached in 2000.45
Similarly, the US Dollar exchange rate affected
commodity prices because most commodities,
including crude oil, precious metals, industrial
metals, as well as grains, are priced in US
Dollars. The effective dollar depreciation seen
over the past few years consequently made
commodities cheaper for non-dollar denominated
consumers, spurring on demand.
In addition to rising stock markets, demand for oil
from rapidly industrialising China, India, and the
Middle East accounted for more than 56 percent
of the growth in oil consumption during 2001–07.
This level of demand pushed crude oil prices to
new heights, reaching the $140 per barrel mark
by mid 2008.46
Higher oil prices meant higher input costs for
farmers using oil to fuel machinery, which in turn
translated to higher end prices in commodities.
In turn, biofuels benefited from the higher price
of oil. At prices comparative to $140 per barrel
for oil, biofuel is a very competitive source of fuel.
According to some commentators, while biofuel
is comparatively more expensive to produce than
petroleum-based transport fuels at current prices,
it can become competitive as oil prices climb. (The
exception to this is ethanol from Brazilian sugar,
which is competitive with petrol at international oil
prices of above $35 per barrel.)47 Bearing that in
mind, reports that state we have just a few years
left before production reaches its peak, together
with the fact that it is a finite resource, we believe
may provide some support of biofuels, and in
particular for corn prices, in future.
Low inventories and poor weather
In the face of this heated environment, there was
also a trend that was being played out on the
commodity-specific side.
Agricultural supplies were tight even in the lead
up to 2008. Stocks of major food crops (including
wheat and corn) in 2008 were at a two-decade
low, so much so that when the 2008 harvest
began, world carryover stocks of grain were at 62
days of consumption, a near record low.48
In such a heated macro-economic environment,
prices tend to be highly sensitive to news flagging
possible supply shortages. And the news had
already flagged weather related production
problems. Droughts in major wheat-producing
countries in 2005-07 were well documented and
harvests in 2006 and 2007 for many grains fell
below expectations.49
Consequently, global concern mounted and
influential voices recognised just how sensitive
the world’s inventories are to both the seasonal
decisions made by farmers planting crops, but
also to short term weather events.
Government intervention preventing free
market trade
As stocks fell and prices impacted domestic
food consumption, governments from both
grain importing and exporting countries began
implementing adverse government policies.
In Africa, some governments cut grain import
tariffs and provided state subsidies to importers
while others banned exports of main cereals
and began grain stockpiling, or taxing other
goods to provide grants for food. In mainland
China, the Government removed the value
added tax (VAT) export rebate on most grains
and introduced export duties of up to 20%.
Looking to secure food for its vast population,
the Indian Government removed import duties
and increased the minimum export price of rice.
Likewise in Asia, Latin America, the Caribbean
and Europe similar policies aimed at securing
food stocks were imposed.50
Supply constraints driving
the asset class
15. 13
However, this government led intervention
had the opposite effect. As in the past, where
attempts to deal with commodity price volatility
relying on direct government intervention (for
example, price stabilization schemes, floor
prices, and guaranteed prices) proved generally
unsuccessful – so too were efforts in 2008. The
World Bank listed 21 countries that had controls
on strategic staples in 2008, according to a
Reuters report in early 2008.51 In the absence
of the moderating force of an open market and
global free trade, commodity prices continued
to overreach until after July 2008, when the
exchange rate of the U.S. dollar appreciated
against major currencies. At the same, energy
prices collapsed, influenced by changes in
income and exchange rates. Lower energy prices
in turn also constrained the profitability of ethanol,
contributing to weaker commodity prices.
The impact of spot prices
Grain prices were also more directly exposed to
various macro financial shocks than ever before
due to the expansion of spot prices and exchange-
based trading. Trade in over-the-counter derivative
instruments has also expanded, and some suggest
it may be many times larger than trade in organized
exchanges. And, with many futures contracts
settled in cash rather than through the delivery of
the underlying commodity, investors outside the
commodity business can now use commodities
to diversify their portfolio, thereby more closely
linking futures markets for commodities with other
financial markets.
Debates also continue regarding the extent to
which the price explosion of 2008 was driven,
in part, by speculation at some of the major
trading desks at global banks. The simultaneous
increase in prices and in investor interest driven
by speculators and index traders in commodity
futures markets in recent years, have the
potential of magnifying the impact of supply-
demand imbalances on prices. However, while
global market uncertainty and trading volatility
can leave commodities exposed, and have a
short term impact on prices, such speculation
is dated. Equally, just as it is a symptom of
short term uncertainty, speculation is also
limited in the impact it can have on a long term
build up of commodity prices as a whole, and
ultimately on demand for food. Even in the
face of what could one day be a repeat of day
trading momentum on commodities exchanges,
long term structural demand factors in
agriculture will remain unhindered by such stock
market activity.
16. 14
Portfolio benefits of
investing in agriculture
Rebalancing the equities glut – and benefits
of real assets
In the aftermath of the Global Financial Crisis of
2008, diversification has become an even greater
imperative for investors. Portfolios overloaded
with equities or highly correlated assets suffered
severe losses through 2008 and much of 2009.
OECD country pension funds were heavily hit by
the financial crisis in 2008, recording real losses
of US$5.4 trillion in value, it total. Australian funds
lost 26.7% in value, US funds, 26.2% and UK
funds 17.4%.52
Much of these losses were attributable to high
portfolio allocations to equity markets, according
to the OECD. Investment losses in Australia the
UK, Ireland and the US were particularly large
because of the large share of equities in pension-
fund portfolios.
In Australia for example, they sat at around 57%
before the crisis hit, compared with an average
of 36% in the 20 OECD countries where data
are available.53
Similarly, in the US the share of equities in pension-
fund portfolios was around 59% before the crisis,54
and in the UK equities in pension-fund portfolios
accounted for around 60% of portfolios.55
In its biannual report ‘Pensions at a Glance 2009’
the OECD now proscribes reforms that include
providing protection against equity market volatility
in future, involving ‘an automatic switch to less risky
investments as people near retirement.’56
Reforming pension systems now to make
them both affordable and strong enough to
provide protection against market swings
citizens will save governments a lot of financial
and political pain in the future.”
OECD Secretary-General Angel Gurría57
Investments with lower correlations to other asset
classes, such as agricultural and real assets, can
help to provide some rebalance through significant
diversification away from equities, but also bonds
and property, which make up the lion’s share of the
traditional portfolio mix. The table below shows the
correlation between agricultural commodity prices,
real estate and the S&P 500 which represents the
return to equities.
Correlation between asset classes (1991 – 2008)
Farmland Timberland
Urban
Real Estate CBOT Soy
CBOT
Wheat CBOT Corn S&P 500 Bonds
Listed
Property
Farmland 1
Timberland 0.95 1
Urban
Real Estate 0.98 0.89 1
CBOT Soy 0.50 0.40 0.49 1
CBOT Wheat 0.55 0.40 0.57 0.84 1
CBOT Corn 0.47 0.36 0.46 0.89 0.84 1
S&P 500 0.75 0.85 0.72 0.12 0.14 0.09 1
Bonds* 0.97 0.93 0.95 0.51 0.52 0.43 0.71 1
Listed
Property** 0.91 0.85 0.95 0.35 0.44 0.32 0.76 0.87 1
Source: CBOT, Bloomberg, NCREIF, Macquarie
* J.P. Morgan Global Aggregate Bond Index (JPM GABI)
** FTSE EPRA / NAREIT Total Return Index
In addition, agricultural investments can increase portfolio returns, and or reduce overall portfolio risk.
In the US, farmland investments as an aggregate asset class have the favourable characteristics of
positive correlation with inflation and low or even negative correlation with many other equity classes and
corporate debt. Similarly in an Australian context, the returns on both unlisted farming operations and listed
17. 15
Chart 8: Consumer Price Indexes
(HICP and US CPI)
Other 84%
Food &
beverage
16%
Food 16%
Other 73%
Restaurant
& cafés 7%
Alcohol & tobacco
4%
Source: Bloomberg60
In addition, total returns from farmland
and other real assets have shown positive
correlation to movement in inflation. In the
US, correlation between the total returns to
farmland and CPI between 1991 and 2008 was
above 0.9.61
Unlike base metals, food is one commodity that
is not discretionary. Hence governments need
to respond to any threat of insufficient supply
or they risk voter backlash or social unrest.
Government responses may include export
constraints, or investing in agricultural production
in other countries. Both historically and today
some governments are arming themselves
for food security, by making sizable foreign
investments via their sovereign wealth funds and
by “land grabs” in emerging markets, in particular,
in Africa. It stands to reason that farmland
asset values should be positively impacted,
as food security continues to be a priority for
governments and gain exposure in the press and
through organisations such as the FAO.
agribusiness companies have historically been
negatively correlated to the returns of other asset
classes and industries.
Low relationship to economic cycles
Food demand for grains remains the core base
of demand for agricultural commodities. The
demand for food is relatively inelastic to income,
making demand for agricultural commodities
less subject to an economic slowdown. This is
evidenced when you consider that consumption
of key agricultural commodities has continued
to grow through previous economic downturns
and wheat, which is the primary food grain, has
been shown to be relatively inelastic to price and
income over a sustained period.
An inflation hedge strategy
In the face of what has been a global and collective
stimulus effort, inflation concerns are suddenly back
on the radar. According to World Bank estimates,
headline inflation is projected to pick up in 2011 to
nearly five percent, as underlying core inflation once
again becomes the dominant influence on overall
rates of price changes.58
Such figures have highlighted the danger of
combined stimulus and lower interest rate policies,
and have some investors talking about inflation
concerns, and possible inflation fighting measures.
Comprising large parts of the inflation basket,
agriculture is a major driver of inflation. Owners
of agricultural assets producing food will
consequently stand to benefit if food prices go up
which may help create a hedge against inflation.
In Europe, food and other related items account
for over a quarter of the Harmonised Index of
Consumer Prices (HICP) which is a consumer
price index, used by the European Central
Bank (ECB) as an indicator of inflation and price
stability. In the US, food and beverage accounts
for more than 15% of the consumer price index
(CPI), a measure estimating the average price
of consumer goods and services purchased by
households by measuring the price of a standard
group of goods meant to represent the typical
market basket of a typical urban consumer. In
low and middle income countries the share of
food in the CPI is substantially higher.59
18. 16
Mitigating Agricultural Risks
Agriculture, like any investment, is subject to a
number of associated risks such as: drought;
disease; desertification; fire; commodity price
volatility; rising interest rate movements for the
leveraged investor; political risks, etc. However
through having a thorough understanding of the
investment, and by utilising careful due diligence
and management practices the majority of these
risks may be mitigated upfront.
Weather events
Seasonal conditions such as drought and
unexpected weather events such as fire, storms
or frosts mean that a proportion of the risk and
returns from agricultural investments are out of
the direct control of operators and investors.
The impact of droughts can be managed,
to a degree, at the farm level by installing
infrastructure such as irrigation and watering
points for livestock. But it is through a
diversification of property locations and hence
rainfall that this risk can be mitigated further.
A single property is a far greater risk than a
portfolio of properties, particularly if the portfolio
of properties is diversified across climatic zones.
Adequate diversification in the underlying portfolio
will help protect agricultural investments against
the full impact of inevitable environmental factors.
Geographically diversified properties, spread
across different climatic zones mean you can
capture the characteristics of different seasons in
different areas, many of them good, but also are
not exposed to adverse climatic developments
across the entire portfolio.
Such diversification can also smooth volatility in
portfolio returns, as there is always a collection of
different crops either growing or being harvested
to sell at one time. Consequently, it is possible to
achieve sales of a variety of products throughout
the entire year, so that income flow is more
regular and cash flow requirements and variability
is minimised.
Disease
In recent times livestock diseases such as Bovine
spongiform encephalopathy (BSE) or “mad cow”
disease, foot and mouth disease and swine and
bird flues have hit headlines. Often times, these
developments are a result of, or are spread
through poor conditions and or deficient animal
husbandry practices.
Additionally, crop plagues can also be
problematic as fungus or insects infest paddocks
and harvests.
While the risk of disease can never be completely
eradicated, operational controls that maintain
strict standards can help to minimise their
eventuality or impact.
In the case of managing animal infections such
measures include maintaining environmental
conditions; maintaining checks on incumbent or
recently purchased animals and limiting herd or
flock sizes. In addition, vaccinations are available
for some diseases and parasites and strict
management of this within flocks or herd can
help to avoid infliction from various diseases.
Crop damage by infestations can likewise be
mitigated through use of a combination of
fertilisers and chemical agents, which can help
to prevent infestation of fungus and or limit any
damage sustained.
But moreover it is by having established risk
management and due diligence policies, along
with diversification of properties, that the risk
of contamination or spread of disease can
be contained and, or its affects on portfolio
returns minimised.
Land valuations
As with any investment, the price at which an
asset is purchased has a major impact on the
performance of a portfolio. Again, diversification
across geographic areas can mitigate the
risk of land values trading sideways in difficult
economic environments. Purchasing properties
that have been identified as having recognisable
performance history in relation to primary
production is a way to reduce acquisition risk.
Prices
Traditionally agricultural producers have
been price takers. Income returns are heavily
influenced by commodity prices which are set
on the world market, broadly on the basis of
supply and demand factors, but which are
Portfolio benefits of
investing in agriculture
19. 17
multiple property ownership, with geographic■■
diversification providing flexibility to manage
drought conditions and take advantage of
stock trading opportunities as they arise;
investment in a highly experienced■■
management team; and
access to capital for continued growth.■■
The structure of the investment plays a large
role in how the returns will be derived. In order
to maximise return and mitigate risk, investors
should seek out investments which are adequately
diversified. For example, Kaplan63 studied the
diversification potential on farmland ownership
and found that in order to reduce the volatility of
farming, large enough scale was required in order
to have land across several regions, and capable of
producing many varied crops.
The chart below demonstrates the relationship
between scale and profitability by showing that as
cattle herd size increases, profit also increases as
a percentage of farm equity.
Chart 9: Specialist Beef Producer
Performance: Cash Income as a Percent of
Far Equity Average 1979 – 2008
CashIncome/FarmEquity
Farm Size – No. Cattle
0.005
0
0.010
0.015
0.020
0.025
0.030
0.035
0.040
>300 300-600 600-1,200 1,200+
Chart 11 demonstrates that the relationship
between productivity and scale. The better-run
(i.e. more productive) mid sized farms generate
greater returns in percentage terms than the
average of their larger peers. Ultimately, large
scale productive properties generate greater
returns than their smaller counterparts.
also impacted by quotas, import controls and
other trade distortions. Historically, producers
have often been in a weak position relative to
produce purchasers, which are usually large
corporations. Additionally there has been a
lack of competition amongst purchasers within
geographic regions.
In the face of such compelling fundamentals
propelling demand for food, it’s likely that as the
factors play out, primary producers will regain
pricing power, and food manufacturers will pass
on higher raw materials costs to consumers.
Productivity growth
The competitive position of either an agricultural
industry, or the broader agricultural sector, depends
not only on relative productivity growth with other
countries, but also on how it performs relative
to other activities competing for those same
resources domestically. Unfortunately, international
comparisons of productivity growth are difficult
to make and interpret because of differences in
methods, data and observation periods.
Over the period 1980–2000, Australia and
the US have had similar rates of productivity
growth and this has been well above average
for agriculture in OECD countries. Productivity
growth in Australian agriculture has been up to
four times higher than the average productivity
growth for the economy as a whole. For a
selection of OECD countries, productivity growth
in agriculture has averaged twice that in other
sectors. Hence, the comparative advantage of
Australian agriculture has improved.62
Operational Scale
The prevalence within the agriculture sector of
small owner-operators who are driven by social,
family, lifestyle and historical factors as much, or
more than financial drivers, often means these
operators do not have access to scale and
cost efficiencies.
Operating profits can be increased
through building scale and leveraging the
accompanying benefits:
reduced per unit costs of production;■■
investment in technology and genetics to■■
enhance on-farm efficiencies;
20. 18
Chart 10: Scale and Productivity
8%
6%
4%
2%
0%
Average
smallfarm
Average
mediumfarm
Topmedium
farm
Average
mediumfarm
Toplarge
farm
Topsmall
farm
-2%
-4%
How to derive returns
from agriculture
Overall returns from investment in agriculture can
be derived from four basic sources;
1. through inflation linked capital growth of the
commodity the farm produces;
2. inflation linked capital growth of the
underlying land;
3. via operating revenue; and
4. land development resulting in higher revenues
and appreciation of land values
Capital inflation linked appreciation
of commodities
Investors in agriculture, who are particularly
interested in liquidity and deriving profits from
more short term sources than land value
appreciation, can do so through the capital
appreciation of inflation linked commodities, that
is by buying futures contracts for example in
the underlying commodity of the farming activity
can for example, be a type of inflation hedge
strategy. By forward selling contracts in wheat or
soybeans, for example, investors can also derive
profit from the arbitrage between and the real
and contract price, in the process taking a bet on
future inflation driving up prices.
The most liquid and often traded tools are
inflation linked derivatives, which attempt to
capture the price return of the commodity futures
market. However investments in agricultural
production with tangible underlying assets,
can also allow for real exposure to the capital
inflation linked appreciation of the commodity
in question.
Capital inflation linked appreciation of
underlying land values
Land values have increased incrementally over
time. In Australia for example, the Agricultural
Price Index (AGPI), which tracks prices of land
per hectare, reveals an increase of approximately
five fold of the price of Australian land from 1980
to 2009 as evidenced in the chart set out below.
Chart 11: Index of $/ha for property sales over
2,000 ha – Base of index 1980 = 100.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
700
Index of $ per hectare
600
500
400
300
100
0
200
■ AGPI ■ Trend
Generally speaking, this data falls in line with
global trends for land prices, a structural shift
which is supported by the diminishing amount
of arable land available globally for large scale
farming. For example, the National Council of
Real Estate investment Fiduciaries (NCREIF)
Farmland index, a quarterly, return measure of
a large pool of individual commercial real estate
properties, has suffered only one quarterly loss
since launching in 1992 – 0.01% in the fourth
quarter of 2001, while USDA figures suggest that
during the high-inflation periods of 1944-1947
and 1975-1981 farmland returns exceeded US
CPI by 2% and 6.6% respectively.64
Portfolio benefits of
investing in agriculture
21. 19
Operating revenue
Operational revenue is derived from the sale of
underlying agricultural commodity.
The demand factors supporting increased
consumption and appetite for protein, demand
for food in general, and in particular for meat
from emerging market economic growth, should
provide a support for agricultural commodity
prices over the longer term.
Agricultural Exposure
– how to invest
There are a number of different investment
options available to investors looking to gain
exposure to the agriculture sector. Each of these
options will provide varying levels of return and
exposure, ranging from passive to direct which
will in turn influence the returns.
Equities
Liquidity is one of the major attractions of gaining
exposure to agriculture via listed equities.
The challenge with investing in agriculture via
equity markets is that the listed universe of
agribusiness companies is relatively limited. For
example The DAX Global Agribusiness Index,
derived from the MSCI World Index, comprises
only 565 companies in total, with a total market
capitalisation of USD $2,905,391.
In addition, the definition of what constitutes
an agribusiness company is very broad. For
instance, beer manufacturers which could
arguably be considered consumer stocks, and
therefore exposed to a different set of return
drivers and economic factors, are included
within the DAX Global Agribusiness Index.
Only 62.8% of the global listed DAX universe
is made up of companies that are actually
involved in what is broadly defined as “primary
production”. Measured by market capitalisation
this represents only 34.4% of the index. A high
proportion of these companies however are in
fact producers of chemicals and fertilisers used
in agricultural production, or are manufacturers of
farm machinery. Agricultural chemical companies
make up 27.6% of the DAX total of companies,
or 50.8% of the index in market capitalisation.
Land Development
The capital appreciation of agricultural land can
be further aided through development work
and via operating improvements which should
drive gross margins and improve the operating
efficiency of farms. Development examples
include, installation of additional watering points
for livestock, clearing land for crop based
activities and through new fence installation.
The operating efficiencies of smaller sub-
economic farms can be improved by combining
two or more of them into one larger aggregation
in order create economies of scale.
The charts below refer to the average rate of
return for ‘medium to smaller scale’ farms carrying
approximately 1,200 cattle or more, and 10,000
sheep or more, compared with the largest scale
and most successful farm holdings in Australia.
A 2.9% average rate of return difference exists
between the smaller to medium sized cattle farms
and those with greater operating efficiencies,
created through scale. In sheep farms, the
difference in operating efficiencies is even greater,
with a 3.7% different between smaller operators
and the top 25% performers.
Specialist Beef Farms – Rates of Return & Volatility
1979-2005
Farms with
1,200+ Cattle
Top 25%
Performers
Average Rate of Return 11.2% 14.1%
Standard Deviation 14.1% 13.1%
Sharpe Ratio 0.8 1.1
Specialist Sheep Farms – Rates of Return & Volatility
1979-2005
Farms with
10,000+ Sheep
Top 25%
Performers
Average Rate of Return 8.8% 12.5%
Standard Deviation 10.6% 10.9%
Sharpe Ratio 0.8 1.1
Source: ABARE Farm Survey65
22. 20
Similarly farm equipment companies make
up 6.2% of the index, or 14.2% in market
capitalisation, while the rest is a balance of
agricultural related companies.66
As such, a number of the listed stocks that fall
within the agricultural category may have closer
return and risk correlations with pure equity and
or consumer stocks, and similarly provide little
real exposure to the agricultural thematic.
Listed agricultural companies may not offer the
desired diversification benefits due to their exposure
to market risk and resultant higher correlation to
the general equity indices. This market risk in turn
leads to confusion regarding the return drivers of
the underlying stock. Agriculture is a long-term
investment, whereas shares prices are often driven
by short-term factors.
Product manufacturers looking to take advantage
of investment opportunities in the agricultural sector
have brought a number of fund offerings to the
market. In general terms these products aim to
tap into the agricultural story by investing in listed
companies aligned with the agricultural sector. One
of the drawbacks, dependent on the fund and
style of investment, can be that the definition and
mandate of the fund may be very broad, resulting in
dilution of the levels of exposure to agriculture.
Futures
Similarly, commodity futures are an alternative
way to gain exposure to individual soft
commodities; this strategy is useful for gaining
short term exposure to the spot prices with the
intention of making profit through speculation.
Due to the short timeframe and the intention to
predict the trends over this period, this strategy
may limit true exposure to the agriculture theme,
and therefore miss out on the underlying growth
and diversification benefits gained from a more
pure play strategy.
Direct investment
Arguably, the most direct and pure exposure to
agriculture currently available is via exposure to
real assets; being the land, livestock assets or
crops. Returns are in the form of any increase
in the value of property; livestock increase in
value driven by rising meat prices based on the
quality of the meat, herd size growth through
natural increase and expansion of breeding the
livestock; and the returns from harvesting crops
or selling livestock. Income results from sales of
the commodity produced on the land.
One way to tap into this direct exposure is via
the owner/operator model. The benefit with this
model is the level of control over key decisions
relating to the running of the property such as
timing around harvesting, sewing crops, which
crops to plant, and the sale of livestock to name
a few. However, given the level of responsibility
which rests with these property managers, it
is important to undertake a substantial level
of due diligence into the manager of the
property. Ensuring the manager has the relevant
experience and knowledge is clearly going to be
important in terms of the overall return delivered
from the property.
A slight variation to the owner/operator model
is the leasing of the property or livestock. While
there may be advantages to this method, such
as tax benefits, there are also a number of risks,
such as contractual risk, should one of the
parties involved not meet their obligations. In
addition, in the leasing model there is the risk of
an inherent misalignment of interests, while in an
owner/operator model the interests of all involved
are aligned to that of the investor.
Farmland ownership and farming are two very
different things. By owning the land, an owner
will realise the increase in the value of land and,
if renting the property out will also receive this
income. Farming on the other hand, is the operation
of growing crops or raising livestock on the land
without the benefit of capital growth on the land.
In addition renters of the land are not incentivised
to adequately maintain the land; rather they may
engage in over-intensive farming practices which
benefit them in the short term at the expense of
the long term quality of the land. Inherent within
this model is the tension between maximising
short-term income returns versus maintaining the
productivity of the land over the long-term.
Gaining exposure via the owner/operator model
allows investors to benefit from a diversified
combination of commodity prices, land values, and
operating efficiencies and profits. Less liquidity is
outweighed by diversified return sources.
Portfolio benefits of
investing in agriculture
23. 21
Conclusion
Global agricultural commodity markets recently experienced
unprecedented price volatility, however we predict that prices are likely to
remain above historic levels, due to a number of factors influencing the
supply and demand dynamic. Demand is increasing due to population
growth, changing diets, increased income and demand for biofuels, while
at the same time supply is constrained due to the availability of arable
land and water, the inability to increase yields materially and government
policies. As a result, we believe that prices are likely to remain at
elevated levels.
For more information about Macquarie Agricultural Funds
Management, please contact:
Tim Hornibrook,
MAFM Divisional Director
P: +61 2 82320579
F: +61 2 82329999
E: tim.hornibrook@macquarie.com
Macquarie Agricultural Funds Management
Macquarie Group Limited
1 Shelley Street, Sydney NSW 2000
Australia
Conclusion
24. 22
Footnotes
1 International Monetary Fund, World Economic Outlook Database,
October 2008; FAOSTAT, FAO Statistics Division 2009, 27 August 2009
2 'United States Leads World Meat Stampede,' Worldwatch Institute,
2 July 1998, http://www.worldwatch.org/node/1626
3 Paul Roberts, ‘The End of Food’ the coming crisis in the world food
industry, Bloomsbury, GB, 2008. 213.
4 Population resource centre: http://www.prb.org/Publications/Datasheets/
2007/2007WorldPopulationDataSheet.aspx)
5 Macquarie Research Economics, Australian Economics, 18 February
2008
6 Population Division of the Department of Economic and Social Affairs of
the United Nations Secretariat, World Population Prospects: The 2008
Revision, http://esa.un.org/unpp
7 Bunge, The Role of Brazilian Agriculture in Human Development, www.
bunge.com/public/pdfs/RoleofBrazilianAg.pdf
8 Macquarie Research Economics, Australian Economics, 18 February
2008; Population Division of the Department of Economic and Social
Affairs of the United Nations Secretariat, World Population Prospects:
The 2006 Revision and World Urbanization Prospects: The 2007
Revision, http://esa.un.org/unup
9 Population Division of the Department of Economic and Social Affairs of
the United Nations Secretariat, World Population Prospects: The 2008
Revision, http://esa.un.org/unpp
10 Macquarie Research, Agriculture: overall, still a positive outlook,
Sept 2008, p5
11 Worldwatch Institute July 2, 1998 ‘United States Leads World Meat
Stampede’ http://www.worldwatch.org/node/1626
12 IMF World Economic Outlook April 2009
13 FAO news release, http://www.fao.org/newsroom/en/
news/2008/1000849/index.html)
14 Macquarie Research, Agricultural Commodities Briefing, 8 September
2009. ‘US Ethanol Policy Update: Short-term optimism, longer term
constraints,’ Kona Haque
15 Macquarie Agricultural Research, Macquarie Securities Group 2010
16 Macquarie Research, Agricultural Commodities Briefing, 8 September
2009. ‘US Ethanol Policy Update: Short-term optimism, longer term
constraints,’ Kona Haque
17 Macquarie Research, Agricultural Commodities Briefing, 8 September
2009. ‘US Ethanol Policy Update: Short-term optimism, longer term
constraints,’ Kona Haque
18 Macquarie Agricultural Commodities Research Division, memo
12 November 2009
19 ibid
20 Macquarie Agricultural Research, Macquarie Securities Group, 2010
21 ‘Big Oil Projects in Jeopardy by Fall in Prices,’ Jad Mouawad, New
York Times 15 December 2008, http://www.nytimes.com/2008/12/16/
business/16oil.html
22 OECD-FAO Agricultural Outlook 2009-2018, p56
23 Macquarie, Agriculture: overall, still a positive outlook, Sept 2008, p4
24 United Nations Population Fund, UNFPA State of the World Population
2001, Ch 3 ‘Development levels and Environmental impacts’
(http://www.unfpa.org/swp/2001/english/ch03.html)
25 UNEP Global Environmental Outlook 3 February 2002 (Chapter 2: Land)
26 Macquarie Research Economics, Global Vision – Agflation, 15 April 2008
27 UNEP Global Environmental Outlook 3 February 2002 (Chapter 2: Land)
28 United Nations commission on sustainable development, ‘The Food
Crisis and Sustainable Development’ May 2008. P2, http://www.un.org/
esa/sustdev/csd/csd16/documents/bgrounder_foodcrisis.pdf
29 Macquarie Research Underlying Data for Charts, Email from Kona Haque
30 Paul Roberts “The End of Food”, the coming crisis in the world food
industry, (Bloomsbury, GB), Pg 213
31 Rand Organisation: www.rand.org/pubs/occasional_papers/2007/
RAND_OP179.pdf
32 ‘The End of India’s Green Revolution?’ BBC News.29 May 2006
http://news.bbc.co.uk/2/hi/south_asia/4994590.stm
33 Conway, Gordon (1997). The doubly green revolution: food for all in the
twenty-first century. Ithaca, N.Y: Comstock Pub. ISBN 0-8014-8610-6.
Chapter 4
34 Kindall, Henery W & Pimentel, David (May 1994). "Constraints on the
Expansion of the Global Food Supply".Ambio. 23 (3). http://dieoff.org/
page36.htm.
35 Paul Roberts “The End of Food”, the coming crisis in the world food industry,
(Bloomsbury, GB), Pg 213
36 FAO Director-General appeals for second Green Revolution’
FAO, 13 December 2006, http://www.fao.org/newsroom/EN/
news/2006/1000392/index.html
37 “Starved for Science” Robert Paarlberg, Harvard University Press, US,
2008 Pg 77.
38 Financial speculators reap profits from global hunger, Stefan Steinberg,
Centre for Research on Globalisation, http://globalresearch.ca/index.
php?context=va&aid=8794
39 Rising Food Prices: A Global Crisis, Overseas Development Institute,
22 April 2008.
40 Aus Food News,‘commodity prices continue to fluctuate’ November 19
http://www.ausfoodnews.com.au/2009/10/26/food-commodity-prices-
continue-to-fluctuate.html)
41 Ibid.
42 Economist Blog, 29 October 2009 http://www.economistblog.
com/2007/10/29/global-stock-market-capitalization-sets-new-record/
43 Ibid
44 Ibid
45 Ibid
46 IMF, FT report: IMFarticle:http://www.imf.org/external/pubs/ft/
fandd/2008/03/helbling.htm).
47 Opportunities for Biofuels and Biomass in the Region,Thomas Legge,
October 2008. UNDP, LSE http://www.developmentandtransition.net/index.cf
m?module=ActiveWeb&page=WebPage&DocumentID=687
48 IMF, quoted in, http://www.scientificamerican.com/article.cfm?id=civilization-
food-shortages) IMF article: http://www.imf.org/external/pubs/ft/
fandd/2008/03/helbling.htm
49 ABARE,Australian Commodities December Quarter 2007 http://www.abare.
gov.au/interactive/ac_dec07/htm/wheat.htm
50 FAO: http://www.fao.org/docrep/010/ah881e/ah881e05.htm ).
51 ‘CONTROLS DON'T REVERSE PRICE TRENDS, EXPERTS SAY’ Reuters online,
7 April 2008 http://www.reuters.com/article/idUSN2538640220080407
52 Highlights from OECD Pensions at a Glance 2009 Australia; US; UK
53 Australia Highlights from OECD Pensions at a Glance 2009, page 1
54 United States Highlights from OECD Pensions at a Glance 2009
55 UK Highlights from OECD Pensions at a Glance 2009
56 Highlights from OECD Pensions at a Glance 2009
57 Highlights from OECD Pensions at a Glance 2009
58 World Bank website: http://web.worldbank.org/WBSITE/EXTERNAL/
EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0,,contentMDK:
20372131~menuPK:659178~pagePK:2470434~piPK:4977459~theSit
ePK:659149~isCURL:Y,00.html)
59 OECD-FAO Agricultural Outlook 2009-2018, p27
60 Bloomberg, HICP Weightings, The Consumer Price Index Breakdowns
and Weightings
61 US Bureau of Labour Statistics, NCREIF
62 Productivity Growth in Australian Agriculture:Trends, Sources, Performance’
Australian Farm Institute. March, 2007
63 Journal of Portfolio Management,‘Farmland as a Portfolio Investment,’
Howard Kaplan, 1985
64 IP&E magazine online article, 'Seed capital' - 30 June 2009, Martin
Steward, IP&E.com www.ipe.com/articles/print.php?id=32104
65 *Source:ABARE Farm Survey. Note:The Top 25% is the top performing
farms in a given year. From year to year there will be variations in the exact
composition of the Top 25% as the performance of individual farms varies.
66 Macquarie Funds Group Agricultural Research, 2009
