A contrarian view on soft commodities

Added 4th February 2016

The agricultural sector has been in negative territory for five years, putting specific food and food input companies at attractive valuations, according to Baring.

A contrarian view on soft commodities

Oil aside, other commodities such as food inputs have also fallen out of favour. The cumulative one-, three- and five year returns for the agriculture sector have all been double-digit negative, according to FE data.

But James Govan, manager of the Baring Asset Management’s Global Agriculture Fund believes opportunities this year are emerging in the agricultural value chain, particularly in the health and wellness niche, driven by the demand for healthier food.

“We have been increasing our exposure to the health and wellness niche, with 25% of the fund invested in companies active in the space. We see long-term, structural growth opportunities in this area.

"Demand to eat healthier is growing in developed and emerging markets, with countries such as Mexico introducing a sugar tax and others witnessing campaigns to act similarly.”

Stock selection will be key to agricultural investing in 2016, particularly since currencies are playing a bigger role in traditional farming, Govan said. Soft commodities are priced in US dollars with local inputs in local currencies. That provides Eurozone and Brazilian farmers higher profit margins due to the decline in their currencies versus the US dollar.

Govan cited an Argentine agricultural producer that should benefit from an easing of grain export taxes by Argentina’s new business-friendly government. Export earnings should also get a further boost following the recent devaluation of the Argentine peso.

“The short-term de-rating in the asset class means that it can be accessed today at what we regard as attractive valuations.

“Longer term, we believe the investment case remains strong with absolute demand for soft commodities set to rise and increasing pressure on the industry to boost production with all the vagaries of the weather.”



About to turn?

The Baring Global Agriculture Fund beat its benchmark over the trailing three years, but both were in negative territory. 



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