Strategic review of the investment landscape across the asset class, with an up-to-date analysis of the major asset categories and a special section on South America’s challenges & opportunities.

The background

  • The food & agriculture asset class includes over 240 investment funds that manage close to $45 Billion in assets, based on Valoral Advisors´ proprietary database.
  • After several years of relative high prices of agricultural commodities and appreciation across the asset spectrum, a combination of lower crop prices and worsening macro conditions across developed and emerging markets has closed a phase in the life of this emerging asset class.
  • This context creates attractive opportunities in several asset categories and regions for long-term investors. Indeed, the asset class has attracted institutional investors’ attention: Pension funds, endowments, sovereign funds and a large range of family offices are assessing opportunities and committing allocations to this sector.

The asset class goes institutional

  • Pension funds across North America and Europe are among the major sources of fresh capital to the sector, in a trend that reflects an evolution in their investment models and their allocation strategies.
  • Some of the largest sovereign wealth funds have also launched dedicated strategies to pursue long-term investments across the global F&A value chain. In contrast to previous investments pursued by SIFs in the past that targeted exclusively farmland, this time they are taking a broad view across the entire value chain.
  • Trading houses are also active players: Besides the “ABCD” group, a new group of Asian regional champions has emerged with the ambition to become global challengers. The group, often called “NOW” includes Noble, Olam and Wilmar. COFCO, from China, is also cementing a leading role after acquiring stakes in Noble and Nidera.
  • The Japanese trading houses have been expanding also their footprint in the global agriculture space.
  • With a much lower profile but with growing appetite for agricultural exposure, family offices from around the globe are increasingly looking to allocate capital to this space.
  • Despite the differences across the institutional capital spectrum in terms of mandates and approaches, all these investors share one thing in common: they are willing to increase their agriculture exposure but they face difficulties in allocating capital and the timeframe to do this will probably extend over the next years.
  • Asset managers are bringing innovations to tackle investors’ concerns by i) enlarging the pool of available opportunities to increase liquidity, ii) developing innovative capital structures, iii) incorporating direct investing and co-investing into the deals, and iv) building institutional track record and strengthening governance.
  • Sustainability factors are being integrated into asset management practices, as pension funds and development finance institutions (DFIs) contribute to the discussion of responsible investing across the global agriculture sector.

The assets’ spectrum

  • Listed equities: In the listed equities’ universe, we track 46 funds and ETFs with total AuM of around $13.6 Billion, which invest across the F&A value chain. 2014 has seen growing appetite for packaged food & ingredients and food traders and processors, against a drop in interest for ag machinery.
  • Agricultural commodities: In the commodities’ space, 2014 has been another tough year as supply and demand factors and a worsening macroeconomic outlook combined to send prices of grains and oilseeds to the lowest levels in many years. Coffee and cocoa where the exception. In this context, we continue to favor absolute return strategies that take advantage of arbitrage opportunities against long-only investments.
  • Farmland: Farmland assets continue to attract capital – Valoral Advisors tracks over 70 farmland investment funds that manage in excess of $15 Billion.
  • Interest among institutional investors in global farmland portfolios is high, following the capital appreciation of the last decade. During those years, farmland prices in the U.S. and in the other major agricultural countries rose driven by a robust growth in global food demand that triggered a rush by global investors to secure land.
  • The rapid appreciation ended in 2014 as the sharp drop in ag commodity prices reduced farm income across major regions. As we start 2015, current valuations in certain markets imply a fairly to fully priced market.
  • Against this bearish short-term outlook, we believe there are relative value opportunities in several markets and commodity segments, beyond the mainstream crops and prime regions.
  • But more importantly, in a world of lower farmland appreciation, we believe that farmland investments should not be seen as a way of parking money in a safe asset, but as active investments to deliver income.
  • We believe that permanent crops can be an attractive component to a diversified agricultural portfolio for a variety of reasons, including their ability to deliver potential higher income and a long-term investment horizon. Institutional investors are taking notice and are expanding allocations to permanent crops, notably across the U.S. and Australia.

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