Environment

Five reasons to invest in agriculture

People cannot live without food. The global population is ever growing and expected to hit 9.7 billion by 2050. Per the United Nations, food intake is projected to grow by 70% both off the back of that trend as well as a general increase (some 12% per person on average by 2050) in caloric intake in both wealthy and developing nations.

Meanwhile, global arable farmland is scarce. If the above population projections become reality, there will be a need for one additional billion tonnes of cereal and 200 million tonnes of meat. That will naturally put a strain on arable land already, but deforestation and degraded forest land as well as soil erosion also reduce the availability of topsoil and make matters worse. On top of land, scarcity is also going to apply to water (of which agriculture is one of the biggest global consumers).

All of this is going to put an increasing stress on the the $5 trillion agriculture sector and upwards pressure on food prices. New advances will be needed to keep up. So what are some of the main advances in agriculture (or as some like to call it, agtech) taking place today?

#1 Robots

Whether it is to plant, control weeds, monitor the crops or reap the harvest, or even pack the final products, robots as a replacement of fieldworkers are an obvious candidate for enhancing the quality and productivity of global agriculture. Even entire tractors could become driverless vehicles.

#2 Drones

Can be used for soil and field analysis from up high, meticulously geotagging every location and providing data that can be useful in planting, watering, pruning etc. Could potentially even be used for spraying and irrigation in much more efficient ways than old technology could do.

#3 Animal trackers / livestock wearables

What if farmers could keep track of their cattle 24/7 using wearable devices? You could limit certain parasite treatments to only animals who frequently go outside. Or you could couple it with technology that can automatically sound the alarm when livestock puts itself in danger.

#4 Sustainable food and meat substitutes

Not only is caloric intake set to rise, but the consumption of meat is expected to similarly go up across the globe. We are destined to see an increasing amount of sustainable food options and meat substitutes in our supermarkets.

#5 AI: Automated irrigation, crop monitoring and predictive analytics

What if there were techniques that were able to constantly monitor the fields, ensuring that soil conditions remained just right and only irrigating precisely when needed and as much as needed? The savings in water consumption could be significant. And what if the farmer had a system that could give him a live status monitor of his crops, making use of crop data and weather forecasts to highlight the optimal days to harvest? Artificial Intelligence could provide the technologies upon which such features are built.

Why agriculture makes sense for investors

One of the last things people are going to save on in any economic downturn is food. Coupled with very strong fundamental prospects and rising prices over the long run, agriculture should make a good addition to any longer term portfolio.

Portfolio construction: Agribusiness and agriculture

  • I construct a portfolio consisting of three ETFs, with TER ranging from 39bps to 70bps, overweighing the former.
  • The largest exposure is to the VEGI ETF, which offers exposure to “companies that produce fertilizers and agricultural chemicals, farm machinery, and packaged foods, and meats”. It has 120+ holdings of which the largest is Monsanto (14%). It’s holdings are roughly 50% in the US and 50% elsewhere
  • The MOO ETF has a similar profile with a smaller number of firms, while the FTAG ETF contains a larger portion of non-US holdings and focuses on firms improving agricultural yields
CategoryNameIDTERAlloc %
All AgricultureFirst Trust Index Global Agriculture ETFFTAG0.70%20.0%
ProducersiShares MSCI Global Agriculture Producers ETFVEGI0.39%50.0%
AgribusinessVaneck Vectors Agribusiness ETFMOO0.54%30.0%

Risk, Diversification And Allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 1.62%
  • Ex-ante predicted volatility: 10.1%
  • 1 year 95% Value-at-Risk: -15.8%
  • Scenario: 2008 Lehman Brothers default period: -26.0%
  • Scenario: Interest rates +100bps: +4.9%
  • Scenario: 2008-2009: -13.4%
  • Scenario: 2010 onwards: +169%

 

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52 week Range -
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