Riding on agribusiness opportunities as food demand rises
Despite recessionary fears, food and agriculture remain necessities and prices are likely higher for longer.
THE pandemic, supply-chain disruptions, the Russia-Ukraine war, and extreme weather conditions have all had an impact on the prices of global agricultural commodities. They have exposed how vulnerable food supplies are and how critical food security is.
As we enter 2023, the recession drumbeat has grown louder. Despite recessionary fears, consumer staples such as food, crops, and agriculture remain a necessity, and China’s reopening will only drive the increase in demand. More importantly, the longer-term secular trend of an increasing global population and a rising middle class provides investors with opportunities in this space.
Return of Chinese demand
China is one of the world’s most populated countries and the leading global food importer. Over the years, the country’s import volumes have been steadily growing. According to Fitch Solutions, in the 1990s, Chinese imports accounted for 4.5 per cent of all foreign grain purchases by volume (encompassing corn, rice, wheat, and soyabean), and this figure has risen to 10 per cent in the 2000s, 19 per cent in the 2010s, and 24.4 per cent in 2020/21.
The reopening of China’s economy after the rapid dismantling of its zero-Covid policy looks set to increase the Asian giant’s demand for food imports, as consumer demand is set to slowly recover now that the worst is likely over for the economy.
In fact, China recently opened its market to corn imports from Brazil in order to diversify away from the United States and Ukraine, which have been its traditional suppliers, and to also accommodate its huge demand for corn imports, which has grown over the past decade.
Long-term drivers for agribusiness
While China’s reopening is set to benefit the agribusiness sector, this is not the only growth driver moving forward. The agribusiness sector has a strong multi-decade bullish thesis behind it. In fact, one of the most compelling trends underpinning the industry’s growth is the rising global population, which is expected to reach 9.8 billion by 2050. Hence there is a pressing need to figure out how to increase our food supply.
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Meanwhile, the global middle class is expected to grow to more than half of the world’s population by 2030, driving demand for more protein-rich foods such as meat and dairy, as increasing disposable incomes open up a range of dining opportunities for consumers.
In particular, Asia’s middle class is growing at a much faster rate compared to Western countries. India and South-east Asia are set to account for the greatest increase in food spending, growing at a compound annual rate of 5.3 and 4.7 per cent, respectively, by 2030.
Higher-for-longer food prices
Agricultural commodities had a strong 2022, as the Russia-Ukraine war and extreme weather conditions pushed prices higher. Going forward, we expect that higher-for-longer food prices will likely remain.
While the Russia-Ukraine war has dragged on for almost about a year now, concerns about food security – given that Ukraine is one of the world’s biggest grain and vegetable oil exporters – still remain. In fact, Ukraine’s grain output has fallen; it is estimated to have declined from 86 million tonnes in 2021 to about 51 million tonnes in 2022, due to the loss of land to Russian forces and lower yields.
Moreover, the issue around Ukrainian supply this season is not just about production but also about the ability to export. The Black Sea Grain Initiative was renewed in November 2022 after Russia had earlier exited the deal, but there is still plenty of supply risk from the Black Sea as it is subjected to the whims of President Vladimir Putin.
Meanwhile, global agriculture demand remains strong even as crop supplies tighten. But this comes as poor weather in key agricultural regions in the US, France, India, and China is shrinking grain harvests, heightening the risk of famine in some of the world’s poorest nations.
For instance, India’s rice crop fell by around 8 per cent in 2022 due to a lack of rainfall, while drought conditions in the European Union have resulted in grain yields that are approximately 16 per cent below the five-year average. Climate change will likely continue to hamper food production either through severe flooding or widespread droughts, challenging agricultural yields and supplies in years to come.
All of these have resulted in rising food prices that have been felt through the economy, evidenced in price controls and trade restrictions by governments, and higher grocery prices for consumers. While food prices have come down a bit since their all-time peak in March 2022, they remain high by historical standards.
Riding on agribusiness
Regardless of where food inflation goes from here, companies atop the food supply chain will remain more resilient. Most notably, those involved in providing machinery, seeds and a range of productivity technologies have historically been able to pass on their costs to consumers. Furthermore, with food security concerns growing, investors may be interested to seek out various companies engaged in agricultural activities.
One may gain exposure to the agribusiness sector via the VanEck Agribusiness ETF. This is the largest pure equity-underlying ETF that provides exposure to the agriculture sector, and comprises companies involved in the farm equipment, seed and fertiliser, animal health, and food transport and processing industries.
Besides investing in the agriculture space, investors can also consider exposure to the broader commodities sector which would benefit from China’s reopening and the tight supply backdrop via the BlackRock Natural Resources Growth & Income Fund. The fund invests in natural resource companies and has an allocation to the energy, mining and agriculture sectors.
The writer is a research analyst of the research & portfolio management team at FSMOne.com, the B2C division of iFAST Financial Pte Ltd, the Singapore subsidiary of iFAST Corporation Ltd.
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