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Feeding the world – a late cycle winner gaining appreciation

Henna Hemnani of Miton’s multi-asset fund range, explains why the fund manager has been building on its soft commodities holdings

We recently introduced the ‘feeding the world’ agriculture theme to our portfolio. As with any position, the starting point of our decision-making process is to consider the data. Global demand for food continues to rise as the population grows and is on track to potentially double by 2050, but resources are limited.

The world’s farmland is shrinking on an absolute basis for the first time ever, intensifying the existing challenge of meeting global food demand. Additionally, more frequent disruptive weather conditions in key growing regions, such as La Niña conditions in South America or muted monsoons in India, threaten the production of a broad range of key crops.

These trends suggest that demand and supply dynamics should be very supportive for agricultural commodity prices and agribusinesses, especially for technological companies focussed on productivity enhancements like precision farming.

However, the other important part of our process is to see some positive affirmation of a theme before introducing it into the portfolios, usually in asset prices, and soft commodity and agribusiness prices have been falling for the past few years. Despite the data being compelling for some time, this area has been completely out of favour and as a result we have had very limited exposure here.

We have continued to monitor this area, and more recently, as we have moved on from a deflationary world to an environment of rising inflation, interest rates, and a falling US Dollar, we have started to see some emerging price momentum. We have seen an uptick in soft commodity prices, for example in soya and wheat, as we get a demand side push in prices.

Agribusiness stock prices are also breaking higher as this typically leads to more demand for machinery and supplies. We think that an inflationary environment combined with more volatile weather patterns is a positive backdrop for agricultural commodities and businesses, and that the sector will continue to recover strength.

Through our regular screening process, we put together a basket of eight stocks, giving us precise exposure to our “feeding the world” theme while keeping our stock-specific risk minimised. Importantly, all of the stocks have sensible valuations and debt profiles so that they can continue to perform well in a rising rate environment.

The basket is diversified across a range of regions including the US, Europe and more commodity-sensitive emerging markets such as Brazil and Chile. It is also diversified across a range of businesses, from aquaculture and farmland to fertiliser and machinery companies.

This position should do well in a broadly rising inflation environment, complementing our overarching macro view, but also add further diversity to the funds as it is driven by some independent long-term structural trends.

This theme still seems to be underappreciated by markets, with only a small percentage of global assets allocated to soft commodities. They have been a laggard but might be a late cycle winner as capital starts to flow out of bonds and other areas that benefitted in the low growth, low inflation and low interest rate environment. We would expect to see further positive price momentum in this area as the market starts to appreciate this theme.

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