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Thursday, February 21, 2013

Big hitters wary of investing in agriculture

By Jürgen Siemer

Agricultural investing
Changes in weather can dramatically affect agricultural output
Heavy hitters have lost appetite for investing in agriculture. As reported by The Financial Times on 27 January 2013, agriculture -- an industry worth an estimated tenth of total global economic output, with enough demand to drive a projected 70 per cent increase in production by 2050 -- has recently seen a turnaround with investors loosing appetite for entering the sector.

While still appealing to some investors, investing in agriculture has become more of a risky venture for those who take into account the fickle weather, political risk and quixotic governments, which can all have a negative impact on returns. According to the FT, since the beginning of the global financial crisis those factors have triggered a turnaround from earlier years when appetite for investing in agriculture was on the rise, with high-profile financial companies and big names in the investment world entering the sector.

“The last big industrialisation”

The FT quotes Richard Ferguson, director of agricultural consultant Masdar Farming, as saying that agriculture is “the last big industrialisation”. According to Ferguson, this is a process which will take between 20 and 30 years and will consist of smaller farms consolidating to form bigger corporate entities. Giving examples of this transformation of the global agricultural sector, Ferguson cited some of today’s big listed groups such asRussia’s Cherkizovo(LON:CHE) and UK-based Black Earth Farming (STO:BEF-SDB), which were formed on the basis of buying individual shares of blocks of land from hundreds of peasants.

Investors seek new routes to investing in agriculture

Analysts explain the decline of investment in agriculture with another factor of concern to prospective investors -- many view this sector as small-scale and localised, where single projects are risky. Based on this concern, new investment opportunities are being sought and investors are exploring ways of making farming more investable, such as by increasing scale or diversity to mitigate risk. An increasing number of investors are tapping agricultural growth via technology and equipment producers in the industry, buying shares in publically-traded companies such as German tractor maker John Deere (FRA:DEE) or Switzerland-based seed supplier Syngenta (VTX:SYNN).

Yet some analysts disagree

And while most estimates point toa trend of accelerating concerns over investing in agriculture and a decline in ventures in the sector, some analysts believe that agriculture is still an appealing and lucrative investment option.

About the author: Jürgen Siemer, senior analyst at Sustainable Asset Management, told the FT: “Prices for land are going up, so investment in agriculture and the value chain is becoming more attractive and there is much more profit to be made.” For more information on the topic visit click here.

Image license: администрация Волгоградской области, CC BY-SA 3.0