Companies involved in processing, distribution and meat, fish and dairy production are forecast to have a strong year, according to Baring Asset Management.
This is on the assumption of another healthy year of production in grains and edible oils.
Processing and distribution companies control large fixed assets such as ports and soy crush plants and benefit through economies of scale with high volume throughout. The meat, fish and dairy companies benefit through cheaper grain and edible oil production costs. In addition, Barings observes that global fertiliser fundamentals have improved, as indicated by stronger nitrogen and phosphate prices, and the asset manager believes that potash prices have found a floor following the Chinese contract with the Russian potash producer OAO Uralkali.
James Govan, fund manager of the Global Agriculture Fund at Barings, says: "In fertilisers, the Chinese settled their potash contracts for USD305 per tonne less a rebate with Uralkali and Canadian exporters, which was in-line with market expectations and fertiliser companies have pushed through higher potash prices in Brazil. Nitrogen and phosphate based fertilisers have experienced a substantial bounce from the fourth quarter.”
The manager is currently very positive on the US poultry industry where the fundamentals are very positive with strong pork and beef prices. Pork prices have recently risen due to the effects of a virus which is estimated to be currently infecting over 30 per cent of the US sow herd. Beef prices are high due to the fact that the cattle herd has been in decline since the 1970s. This environment should be positive for poultry prices at the same time that the industry is benefiting from lower grain and edible oil input costs. We believe this bodes very well for profit margins.
Barings has further broadened the Global Agriculture Fund portfolio through additions to its position in North American paper companies. With the sector consolidating over the past few years coupled with the recent closure of a major paper mill leading to increased prices, sector stocks have proven to be positive contributors to performance.
Govan says: “In terms of current positioning, we have a diversified portfolio across the food chain. We have recently increased fertilisers as prices rebound and fundamentals continue to improve. Meat, fish and dairy along with processing and distribution are substantial absolute and relative positions compared to the benchmark index, although we have taken some profit at the margins. Geographically, we are very focused on North America at 60 per cent of total weighting while we remain cautious on emerging markets with only nine per cent.”
