MACQUARIE AGRICULTURAL FUNDS MANAGEMENT 1st Quarter, 2012
Food for thought IN THIS EDITION Farmland opportunities The role of agricultural beyond the U.S. investment in uncertain times Following an analysis of the emerging bubble in the U.S. farm land market in our last edition, we take a closer look at the investment opportunity outside the U.S., focusing on Brazil as an alternative. We observe that agricultural land in the U.S., comparable on a productivity basis, is priced a multiple of 3.4 times that of land in Brazil1. With similar yields and marginal differences in input and transportation costs, we conclude that the price differential is difficult to justify. An analysis of relative returns showing a healthy premium in Brazil supports our conclusion. Further, we identify potential upside in Brazil from improvements in transportation infrastructure and the downside risk in U.S. farm values from changes to farm subsidies and rising interest rates.
Global agriculture’s super trend: soybean exports to China
A strong long-term trend has emerged in global agriculture over the last 15 years: the rapid growth in protein consumption in emerging markets. The trend has been particularly evident in China where the appetite for pork and other meats has been growing strongly. The production of meat has become increasingly reliant on imported animal feed ingredients- the most important We investigate the diversifying properties of these is soybean. The pace of of agriculture and apply an equity beta this growth has meant that China analysis to farm land in Australia, the has gone from being self-sufficient in U.S. and Brazil. The conclusion is that soybean consumption to the world’s farm land has displayed low correlation largest importer, now accounting for to the broader equity market. In further half of all soybeans traded globally 2. analysis on Brazilian agricultural land We find that most of this growth has and hedge funds for a comparison, been met by a rapid rise in soybean we see the persistently low equity land area in Brazil and Argentina, where beta component of its total return. production has increased by more than 70 per cent during the last decade 3. Overtaking the U.S. recently, Brazil Continued page 9 is now the major supplier to China with 35 per cent market share 4. It has been an eventful few years for investors. For some, the diversification offered by traditional investments and even many alternative assets, has been less than expected or has been in decline. This has left a dwindling pool of asset categories available to portfolio managers seeking diversification from equity risk.
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Univ. of Illinois; Global Farm Partners; USDA; Goagro; HighQuest Analysis USDA, FAS data set, March 2012 USDA Long-term Projections, February 2011 USDA Projections to 2021, February 2012