Precision agriculture has seen significant advancement
Andros Florides, senior portfolio manager, KBI Global Investors, also talks about the amended China Food Safety Law, effective October 1st 2015, which is the harshest food safety law in history.
What innovations have you seen in the agricultural sector?
Innovation has been tremendous with spend on research and development, especially with seed and crop protection. Advancements in biologics as an alternative to crop protection chemicals is also fuelling impressive growth. Precision agriculture which means observing, measuring and responding to field variability has also seen significant advancements and integration.
Where does agriculture sit, as an investment, in a portfolio?
It is good for clients interested in sustainability or impact investing who want to solve food shortages. Agriculture is also an appropriate satellite allocation which means an investment that minimises tax and volatility but outperforms the market because it has had a period of underperformance.
To what extent is there a performance trade-off when investing in green funds?
It is clear from academic studies that there is no trade-off and that investing in a sustainable way can help to generate returns that are at least as strong as vanilla investments. Furthermore, common sense is probably just as useful as any academic study and companies that pay attention to sustainability issues are more likely to be well-managed.
Tell us about “farm to fork”
There are a wide variety of global investment opportunities in companies who have clear processes from ‘farm to fork’ providing diversification along with exciting innovations and stock specific investments. Investments can be categorised in two ways. There are ‘upstream’ activities which are from those furthest away from the consumer such as farmers and their inputs or products needed to enhance their produce or yields like fertilisers, seeds, agricultural equipment. These are typically driven by farmer income, and so it depends on the price of agricultural commodities they buy like rye, wheat or hay. There are also ‘Downstream’ activities which are related to infrastructure so storage, handling or transportation and processing to make healthy living or convenience foods. These are typically driven by the volume of agricultural commodities and by demographic factors. Of the two, we currently favour downstream stocks because of strong harvests.
What is being done to address food security?
Food safety is a mounting issue globally. In China in 2008 at least six children died and 300,000 fell ill after consuming milk products contaminated by melamine which is a compound heated and used in making plastics. The amended China Food Safety Law, effective October 1st 2015, the harshest food safety law in history, is a direct response to the scandals.
And food waste?
round thirty percent of food is wasted or thrown away. Farm storage, better transportation and supply chain services can address this issue, but it will require significant investment.
Should I invest in companies that reduce food waste or those that increase crop supply?
Both angles are attractive as they tackle the agricultural supply and demand imbalance. Most discussions focus on increasing crop supply, but as noted previously, tackling the issue of food waste can have a profound impact and is often overlooked.
Tell me about investment opportunities in ‘precision agriculture.’
Precision agriculture is the farming management concept which uses technologies such as satellite positioning systems, remote sensing along with big data to optimise the use of resources, such as water, fertilisers, pesticides, or seeds to increase yields, minimise agricultural-inputs and improve the sustainability of agricultural production. There are many opportunities to invest in precision agriculture via listed equities through a combination of larger agricultural conglomerates and smaller more focussed entities.
Are the opportunities in emerging markets worth the additional risk?
A very significant proportion of the increased demand for food in the coming decades is set to come from the emerging markets. This reflects a disproportionate share of the growth in global population, growth in the middle classes and urbanisation. This creates bountiful opportunities to invest in these markets. As with any investment though, one must balance these opportunities with the risks.
Will EU subsidies stop after Brexit?
EU subsidies (€27.6bn from 2014-2020) will end with Brexit. The Chancellor of the Exchequer has said that the UK would secure the funding provided under the Basic Payment Scheme until 2020. Agricultural environment schemes already in place would be guaranteed until their conclusion.