The compelling long term drivers for investing in food and agriculture are indisputable. A rising global population (60 million more people to feed every year), coupled with rising affluence in developing markets are driving greater consumption towards higher protein, more grain intensive foods. According to the UN, this trend, combined with a 13% projected rise in per capita food consumption will require a 70% increase in food production by 2050.

Why equities rather than soft commodities?

We believe that over the medium-term, investing in listed equities across the food and agriculture value chain demonstrate better risk-­adjusted returns than an allocation to soft commodities, for which prices are increasingly volatile, due in part to tighter stocks-to-use ratios. (The ratio that indicates the level of carryover stock for any given commodity as a percentage of the total demand or use.)

The graph below illustrates the disappointing historical performance of soft commodities on a risk-adjusted basis. The information ratio (expected active return divided by the tracking error) is largely negative indicating a low consistency of returns.

The RICI Agriculture index is a composite USD-based, total return index, designed to track the agriculture component of the broader Rogers International Commodity Index.

Soft Commodities: unrewarded risk



In contrast, the sector of listed, food and agriculture companies comprises a large, diversified group that is capturing the high rate of growth of shareholder value in these markets with much lower volatility. In addition, as is typical for many high growth areas of the economy, stocks in this group are often exposed to material changes in regulation and technology and to corporate activity, making them attractive to an investors seeking mis-priced securities.

Combining Food AND Agriculture listed equities improves risk adjusted returns

Historically, many if not most investors seeking equity exposure in this area have focused on agriculture stocks, which generally capture some of the upside of soft commodities but with lower volatility. However, as shown in the graph below, by adding food stocks, which have lower betas and are often highly cash generative, it has been possible to generate compelling risk-adjusted returns.

Performance of the food universe and agriculture universe and the performance that can be achieved by combining the sectors

Scope for active investment management to add value

Impax aims to improve further on the projected returns for investors by active management of a portfolio of food and agriculture stocks. We classify the Food and Agriculture sectors as follows:

After a prolonged period of under-investment, this industry is now attracting significant new capital globally in order to meet these complex challenges. The established supply chains are changing, new ones emerging and we are also identifying opportunities in ancillary goods and services.

Our focus is on companies that deliver a strong, consistent return on invested capital or those which have the potential for higher returns, but are mispriced by the market. We also expect the sector to deliver additional value through merger and acquisition activity as global trade expands and Western companies look to expand to the East, particularly into Chinese markets, and vice versa.

The food and agriculture sectors look set to undergo unprecedented developments over the next ten years. We believe that rapid demand growth and the efforts to increase agricultural efficiency and distribution infrastructure, and reduce waste will be the major drivers of investment and the best risk adjusted returns will be accessed via a concentrated portfolio of global listed equities across the entire value chain.