Strategy

Investment Opportunities In Agricultural Equities Remain Attractive - Barings

Stephen Little Reporter London 16 July 2013

Investment Opportunities In Agricultural Equities Remain Attractive - Barings

In contrast to the drought last year in the US, investors have a lot to gain from the favourable weather and soil moisture conditions over the next few weeks, argues James Govan, investment manager of the Baring Global Agriculture Fund.

Going into the key pollination period over the next few weeks, the conditions are likely to result in relatively strong US corn and soybean production this year, explains Govan.

Against this backdrop, Govan is positive on processing and distribution, an area which is generally leveraged to crop volumes due to the large fixed asset bases of companies operating in the industry.

Outside of processing and distribution, Govan favours selected meat, fish and dairy producers as he believes that the earnings power of companies in these sectors is not yet appreciated by the market.

He points out that meat producers have been benefiting from robust pricing and would be a major beneficiary of lower crop prices through reduced input costs.

"May was a record month for the profitability of the US chicken sector, and we believe there is scope for further improvement with potential lower crop prices in the autumn following the US harvest. Longer-term, the outlook for meat producers remains highly attractive, in our view, given rising protein consumption globally, particularly in the emerging world," said Govan.

Turning to timber, he says it offers rich investment potential in the current environment as it is a direct beneficiary of a recovering US housing market.

"Industry commentators estimate that the US needs to build around 1.5 million housing units this year, approximately double the number completed last year, and this would lead to strong and sustained demand for lumber. West Fraser Timber is an example of a stock which plays directly into this theme, given that it is the largest supplier of lumber in North America," said Govan.

Govan forecasts strong US farmer profitability and predicts farming economics will remain robust for the upstream sectors of fertiliser, seed and crop protection and machinery.

"Despite this encouraging backdrop, we believe investor sentiment is likely to remain cautious on the upstream sectors in the near-term due to the possibility of lower grain prices," said Govan.

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