I don’t believe there’s any need to rush into Agri stocks as an inflation play right now. First, I suspect inflation will take far longer (than many currently seem to expect) to overcome the current wave of de-leveraging. And second, the primary real asset conduit for inflation, via the banks, is always Property - which eventually spills over into Natural Resources, and finally into Agri stocks (inc. soft commodities). Regardless, I still think Agri’s always an attractive asset class, and I’d be perfectly happy to increase my exposure if the right opportunities come along. Let’s recap the attractions of Agri:
- Steadily increasing demand due to global population growth (but isn’t everything..?!)
- Higher demand also (via increased consumption & waste*) due to rising global per capita incomes – basically this is an emerging/frontier markets growth story
- Rising incomes also prompt people to trade up to, and increase demand for, protein (specifically, meat), which requires far greater agricultural resources to produce
- It’s pretty insensitive to the economy: Food’s a high priority in emerging/frontier markets, and developed market food spending (as a % of income) has declined dramatically in the past 30 years. And remember, people avoid reducing calorie intake in downturns, they just make substitutions
- Obviously it requires capex & operating expense investment, but biological growth provides a wonderful (& uncorrelated) investing wind at one’s back
- Finally, of course, it offers a great (later stage) inflation play
* Shocked to learn up to one third of global food production’s wasted? Less shocked to discover the US is the worst offender? This global food waste chart sheds light – similar waste levels in global food production & distribution suggests inevitable & unavoidable wastage within the supply chain, but still highlights a huge opportunity for waste reduction. The pronounced difference in consumer wastage, however, is pretty…sinful! But where goes America, everybody follows – hard to believe food wastage will be a long-term aspiration for emerging/frontier market consumers, but unfortunately I’d bet on it…
So, Agri stocks offer relatively uncorrelated exposure (on an underlying basis) to pretty favourable secular growth (and emerging/frontier market) trends. What’s not to like?! Well, like any great/compelling investment theme, there’s two key challenges/risks – we need to find stocks that genuinely offer the desired exposure, and then we need to avoid over-paying!
[Then, of course, there's the risk of hucksters/con-men…
