The price of food has been soaring around the world. In February, the Labor Department reported that the price of food rose 3.9 percent, the largest monthly gain since 1974. That was merely a blip compared to soaring food prices in China, where in January the price of fruit rose 34.8 percent and the price of food overall rose 10.3 percent overall.
While the growth of food and commodities prices have slowed in recent months along with the global economy, the long term trend is up – way up. The global population is expected to rise to 9 billion in 2050 from 6.5 billion today. Rising demand for more sophisticated foods in emerging markets is pushing prices higher, as is the demand for agricultural products in biofuels, according to Adam Patti, CEO of IndexIQ, an asset manager based in Rye, NY, Patti, a serial entrepreneur who once ran the Fortune index business for Time Inc, foresees longer-term shortages of food amid rising need and want.
“We may see a lot of scary things happen as the demand for food outstrips supply,” he says.
Soaring demand for food will create opportunies for investors, though. In March, Patti launched the IQ Global Agribusiness Small Cap ETF, which is listed on NYSE Arca under the symbol CROP.
The fund, which has $60 million in assets, seeks to capture the soaring value of agribusiness by investing in smaller, lesser known companies. “Most investors in agribusiness tend to buy the same, large-cap names. Based on our conversations with asset managers, we felt that the market for agribusiness was under served,” he said.
IndexIQ structured CROP as an exchange traded fund, which is similar to a mutual fund but trades throughout the day, instead of just at the end of the day. And unlike a closed end mutual fund, which also trades throughout the day, an ETF allows investors to trade in their stake for a basket of underlying securities. That provides liquidity and helps the fund trade at a level close its its net asset value. While most ETFs are linked to indexes, the SEC has allowed for actively managed ETFs since 2008.
IndexIQ operates 14 ETFs and one mutual fund in three niches – absolute return, real assets, and small and mid-cap international markets.
Patti says he usually prefers the ETF structure for its tax efficiency, liquidity and generally superior value.
Patti says IndexIQ develops its products by speaking with asset managers and asking them to explain what they need. In the case of agribusiness, it was clear that the underlying market held lots of opportunity. In real terms, commodity prices during the 2o11-2020 period are expected to be sharply higher than they were in the prior decade--up 20 percent for cereals and 30 percent for meats, Malaya Business Insight reported on June 24.
That growth reflects population growth and millions of increasingly affluent consumers in many parts of the global emerging economy. And in China, the movement of people from rural areas to cities is promoting the destruction of farmland to make room for more housing, Patti says. Climate change is “challenging” agricultural quality as well. The use of biofuels is creating more demand for sugar cane and corn, too. European airlines such as Lufthansa, KLM and British Airways have announced plans to run planes with biofuels, even though that shift could lead to higher fuel prices, the Ecologist reported.The UN has warned against the growth of biofuels, the Ecologist said. The airlines said the planes would use fuel based on crop plants such as oil palm and jatropha. There is a fear that the increased demand for palm oil will lead to destruction of tropical rain forest, the Ecologist said.
Growing demand for food will drive the price of wheat, corn and livestock higher, according to Patti. CROP looks for a range of companies that will benefit from those fundamentals.
“We look for companies that are under represented in portfolios, which are typically 30 percent cheaper than large cap companies on a price to book and price to earnings basis,” he says.
Among the 42 holdings in the fund: Tractor Supply Co, of Brentwood, Tenn., the largest US retailer for farmers; Viterra, the livestock and agribusiness company based in Regina, Saskatchewan, and Smithfield Foods, the meat company based in Smithfield, Va. All three companies have market caps of less than $5 billion.
Smaller companies tend be more focused than larger cap companies, allowing investors to tap a pure play in a given market, according to Patti. They also are more likely to be acquisition targets, which can create upside for investors.
Are there risks to the investment thesis? Patti says a sustained downturn in emerging markets will dampen demand for food. But over the long-term, he says the outlook for emerging markets is likely to support demand for a broad range of “soft” commodities and companies linked to them.
