Investing in Agriculture and Food Production

An ever increasing global population and growing affluence of developing countries means that the world needs an ever increasing amount of food in order to feed the global population. Investing in agriculture should, therefore, be a good long term investment theme for the 21st century.

ETFS Securities provides a number of Exchange Traded Funds (ETFs) that track the spot price of a wide range of agricultural products from crops to livestock. The ETFs use futures contracts to track the underlying prices of these commodities.

These ETFs group agricultural products into a number of categories, including:

Grains (wheat, corn, soybeans)

Softs (sugar, cottom, coffee beans)

Livestock (cattle and lean hogs)

There are also a few agricutural products that don't fall into any of these catagories, such as soybean oil and cocoa.

ETFS Securities provide a wide range of different ETFs to allow investments to be made in these commodities. There are ETFs that allow investments to be made in individual commodities. There are also ETFs that invest in groups of commodities such as the grains, the soft products or livestock. There are also ETFs that invest in a basket of agricultural commodities (such as the ETF with the London Stock Exchange ticker of AIGA). Since the prices of individual commodities can be extremely volatile, investing in a basket of commodities reduces price volatility.

Commodities are normally priced in US dollars, but ETFS Securities also provides some commodity ETFs that are priced in pounds sterling.

In order to enhance the returns from investing in commodities, a number of leveraged ETFs are provided. The leveraged ETFs track the underlying commodity price by a multiple of two. This means that if the price of the commodity goes up 3%, the leveraged ETF price will rise by 6%. Of course the reserse is also true - a 3% price drop will result in the ETF falling by 6% in value. Leveraged ETFs are for experienced investors!

For investors who think the price of a commodity is too high and due for a fall, ETFS Securities offers a number of Short ETFs that increase in value as the spot price of the commodity falls. Obviously if the commodity price soars then these short ETFs can theoretically fall in value to zero, but the advantage of ETFs compared to spread betting is that it is only possible to lose your initial investment, and not more than your initial investment as is the case with spread betting on commodity prices.

ETFS Securities also provide ETF investments in other areas, such as investing in gold and other precious metals.

There are a number of unit trusts that allow investors to invest in the agriculture and farming area. Three popular funds are the Baring Global Agriculture fund, the CF Eclectica Agriculture fund and the Sarasin AgriSar Income fund.

The Baring Global Agriculture fund has a global mandate to invest in companies associated with the agricultural and farming industries. The largest percentage of investment capital is invested in the United States. It is heavily invested in the shares of food producing companies, as well as the companies that produce fertilizers, pesticides, farming machinery such as tractors and other agricultural inputs. There is a small amount invested in the shares of companies in the forestry and paper industries, as well as the food retailers that ultimately distribute foodstuffs to consumers.

The CF Eclectica Agriculture fund and Sarasin AgriStar funds have a similar investment strategy to the Baring Global Agriculture fund, so there is little to choose between the funds.

The Sarasin AgriSar fund is available as both income (pays out dividends) as well as accumulation units (which reinvests the income generated by the fund).

All three unit trusts are available through the major discount online brokers and fund supermarkets and financial advisors. The funds have high initial charges of around 5%, but fund supermarkets and discount brokers tend to refund some or all of the initial fees.

As well as the unit trusts listed above it is also possible to invest directly in shares of companies that profit from food production. This can include companies that mine fertiliser raw materials to food processors and even supermarkets that sell the food to the end consumer.

As well as agricultural companies, investing in water companies is a way of benefiting from future growth in food demand - all crops and livestock need water!

Investing in farmland is another way of benefiting from future rises in food production.

The author of this article is not authorised by the UK authorities to give financial advice. This article does not consitute financial advice. Before making investment decisions consult an independent financial advisor.