Agriculture funds aim to harvest profit, along with corn and wheat

  • By Tim Gray,
  • The New York Times News Service
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Two realities undergird the investment case for agriculture: The world’s population keeps swelling and everyone must eat.

A third reality — climate change — will make satisfying those billions of appetites harder and companies that can help farmers potentially more valuable.

Agriculture isn’t a standard investment sector in the way that, say, financial stocks are, and definitions of it vary, including things ranging from the obvious, like the American equipment-maker Deere & Company (DE), to the offbeat, like Leroy Seafood (LYSFY), the Norwegian fish farmer.

“When we talk about agribusiness, we’re talking about everything from producers of agricultural goods and agrochemicals to fertilizer, animal health, seeds and farm equipment,” said Brandon Rakszawski, VanEck’s director of product development for exchange-traded funds. The VanEck Vectors Agribusiness Exchange-Traded Fund (MOO) is the largest agricultural index fund, and it returned an annual average of 7.3 percent for the 10 years that ended in September.

Farmers today operate self-guided tractors steered by GPS, use drones to monitor crops and employ artificial intelligence in irrigation. Robots will probably take cowhands’ jobs before they take yours.

Agriculture is a major export business in the United States — which has lately been a source of stress. American agricultural exports have been hampered recently by the Trump administration’s trade war with China.

“China was a big and important market” for farmers in the United States, said A. Blake Brown, a professor of agricultural and resource economics at North Carolina State University. “So the retaliatory tariffs have been difficult.”

In 2017, before the trade spat began, China ranked No. 2, behind Canada, on the list of destinations for United States agricultural exports. In 2018, China fell to fifth, behind Canada, Mexico, the European Union and Japan. Figures for this year aren’t yet available, but crucial exports to China, like soybeans, are down substantially, while countries like Brazil have been filling the gap.

Current politics aside, American farmers and the companies that support them are likely to continue to help nourish the world. Global population is expected to rise from about 7.5 billion to nearly 10 billion in 2050. The United Nations estimates that 70 percent more food will be needed by then, but it will have to be produced on just 5 percent more arable land.

Rising affluence in formerly poor countries is also putting upward pressure on grain prices, said Lucas White, manager of the GMO Climate Change Fund (GCCHX), which caters to institutional investors.

“The emerging markets are developing their middle classes and new eating habits,” he said. “Before, they were eating basic forms of food, and now they want more meat and fish. Meat is incredibly grain intensive. Producing a pound of beef takes many pounds of grain.”

Some people invest in agriculture for reasons other than profit. Karin Chamberlain, director of impact investing for Clean Yield Asset Management in Norwich, Vt., said many of her firm’s clients “ feel strongly about climate change and supporting agricultural practices that focus on soil health and the carbon capture it promotes.” Apart from her work in asset management, Ms. Chamberlain raises lambs on her farm in New Hampshire.

For investors who take a long-term view, options for investing in agriculture are nearly as varied as the crops in the fields.

They range from actively managed mutual funds that put a portion of their shareholders’ money into agriculture and related sectors — no actively managed fund tracked by Morningstar invests exclusively in agriculture — to E.T.F.s that invest in either agribusiness stocks, commodities futures contracts or real estate investment trusts that buy farmland.

Mr. White keeps a chunk of the GMO Climate Change Fund’s (GCCHX) assets in agriculture stocks. He said he views agricultural advances, such as salmon farming, as crucial to adapting to a hotter, hungrier world.

Similarly, roughly a third of the assets of the Fidelity Global Commodity Stock Fund (FFGCX) are earmarked for agriculture. That fund’s manager, Jody J. Simes, said that partly reflects the ingenuity of North American farmers and the fertility of their land.

“The U.S. and Canada are the most productive and sophisticated agricultural producers in the world, and they have a natural resource advantage,” he said. The fund also invests in energy and materials, and, as its name implies, prospects globally. Recently, its largest holding was Nutrien, a Canadian fertilizer producer.

Another actively managed fund that favors agriculture is the Pax Global Environmental Markets Fund (PGINX). Its managers assess stocks based on traditional financial measures, as well as environmental, social and governance performance.

For agricultural holdings, they seek outfits that can help make crops and land more resilient and reduce the environmental impacts of farming, said Michael Landymore, an adviser to the fund who works for Impax Asset Management, the British parent of the Pax World Funds.

One such holding is Royal DSM, a Dutch chemical company that has developed a food additive, called Clean Cow, that reduces the methane, a greenhouse gas, released when cows burp and pass gas, he said. Livestock accounts for about 15 percent of greenhouse gas emissions, according to the United Nations Food and Agriculture Organization.

Futures contracts are how the Invesco DB Agriculture Fund (DBA) strives to capture the value of agriculture. Futures originated as a way to manage the risks of trading agricultural commodities; they are contracts that obligate the buyer to purchase a particular quantity of, say, corn at an agreed-upon future date and the seller to deliver that corn. Today, they are traded like other securities.

Agricultural futures can be volatile, said Jason Bloom, global macro E.T.F. strategist for Invesco. Partly, that’s because the markets are small, compared with those for stocks and bonds, and prices in smaller markets tend to skitter here and there, said Mr. Bloom, a former commodities trader. And partly it’s because the prices of the underlying agricultural products are whipped around by unpredictable forces like the weather.

“It’s hard to get the weather right even five days out,” he said.

The benefit of futures investing is diversification, Mr. Bloom said. The contracts’ values tend to zig when the stock market zags. Lately, as the stock market has continued to bull upward, those zags have been more down than up. The fund lost an annual average of 4.54 percent over the 10 years that ended in September.

Another way to try to profit from corn and wheat is through real estate investment trusts, or R.E.I.T.s, that hold farmland. R.E.I.T.s trade like stocks but operate a lot like mutual funds inasmuch as they own other entities and profit from their operations.

Farmland Partners owns or has contracts with farms in 15 states that together total more than 162,000 acres. The company, which is based in Denver, grew out of the personal investments of its chairman and chief executive, Paul A. Pittman. Mr. Pittman, a former investment banker, began buying farmland in the ’90s, starting with a property his grandfather had owned. That purchase led to others in the Midwest and eventually the formation of the R.E.I.T., which became a public company in 2014.

“I just liked the investment thesis,” he said. “Owning farmland is hitching your wagon to this incredibly powerful trend of gradual increases in food demand with rare setbacks.”

Owning land can be a more dependable business than farming itself, he said, because the returns are based on land scarcity as well as the world’s swelling appetite.

“Farmer profitability is largely based on this year’s weather and crop price,” he said. “What happens is the volatility in the food production largely falls, positive and negative, on the farmer.”

The Farmland Index, maintained by the National Council of Real Estate Investment Fiduciaries, returned an annual average of 11.05 percent for the 10 years that ended in June.

Another R.E.I.T., Iroquois Valley Farmland, has a more specialized niche. It buys land and leases it to farmers who want to grow crops organically. Like Mr. Pittman, its founder, David E. Miller, started off with a farm with family ties — he bought one from an uncle in Illinois. Today, Iroquois Valley owns more than 50 in 14 states.

“We’re focused on working with experienced farmers but young ones,” Mr. Miller said. “Their parents are still farming conventionally. Because they don’t have the family acreage yet, the opportunity is for us to buy land to lease to them.”

Iroquois Valley’s equity shares aren’t publicly traded but are sold directly to investors, under rules set by the Securities and Exchange Commission. The current minimum investment is $10,183, and investors must hold their stakes for at least five years.

The company’s land holdings have grown as its farmers have referred others who’d like to farm organically, which promises potentially higher profits than conventional methods, Mr. Miller said.

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