The Agricultural Outlook Americas Conference was held in Boston this week. This year's event brought together a mix of growers, investors and technologists, with discussions ranging from new investments on the farm to currency hedges. The three day event contained too many interesting discussion points to cover in a single article, so I will address only the highlights here, with follow-up related to some of the focused discussions in future columns.
On the first day of talks, much of the focus was decidedly LATAM, with a recurring theme addressing a potential land bubble across all of the Americas. With the ag commodity futures markets as volatile as they have been lately, readers should note that the focus was weighted towards investment opportunities with a slightly longer time horizon, and the focus started out with an emphasis on farmland acquisition opportunities, and how to view potential exits with a multiyear, or even multi-decade holding period. Many of the discussed opportunities always seemed to always point back to Brazil, but difficulties associated with foreign investment in land assets were noted. Investing directly in agribusiness holdings with strong financials and/or targeted ETFs may provide the easiest access as a starting point (CZZ, BRXX, BRAQ).
In one panel in particular, each panelist was asked about a potential bubble in agricultural investment (primarily land), the response was a resounding no. But it is important to remember that agricultural land is still essentially a real estate play, and the forces of supply and demand are still at work. We all know the statistics that support the premise that intensification of agricultural production will be absolutely necessary if we are planning to adequately feed the growing population in the coming decades (there are an expected additional 1 billion mouths to feed over the next few decades). Intensification, while replete with drawbacks, also implies that the rate of growth regarding agricultural land expansion may level off. Additional acres to support more mouths notwithstanding, the speculation on support for increasing land prices was not, in my opinion, provided with adequate support.
One point that was underscored, was that a tremendous amount of emphasis is anticipated to go into Brazil and Africa, with, at least in the minds of the majority of speakers, a less bullish stance on expansion in China and India. While this may not be much of a surprise to most, what I truly did find surprising was the lack of mention, anywhere, of India. There are well known difficulties associated with foreign investment in land in India, but there are still investment vehicles that provide an investor exposure to this rising asset class. Indian infrastructure companies can be tied to port and road construction, irrigation and water development, among other variables, and there are numerous ETFs that can allow the individual investor to capitalize on these markets (INXX, PIN). As the week went on, discussions started to focus on more strategic investment themes for the sector; the usual suspects (population growth, EM growth, protein demand, etc.) tended to contain the broad themes, supplemented with country specific projections that tended to focus on targeted crop expansion and technological innovations. Regarding the innovation theme, there was an interesting observation. The global agricultural community, which is a collage comprised of big agribiz (think Cargill & ADM), family farms in Mato Grosso, bankers/hedge funds (many of which have no clue how things grow), and everything in between. As I do much of my work at the first link in the global supply chain, I attend numerous events like this each year. When working with such a diverse group, it is often difficult to achieve consensus on anything, and particular reverence is often displayed towards new technologies. This is very notable among the grower community, whose farms and farming techniques are often passed down through generations, just like a watch or a wedding ring. After expecting the usual pessimism regarding cooperation (and there was plenty), the common thread that seemed to permeate all discussions which led to consensus, was data.
The innovations in agriculture that grab most headlines are usually related to new seed varieties or physical infrastructure related to increased efficiencies in drip irrigation. So after one panel session comprised of investors looking for opportunities in both hemispheres of the Americas, I asked about the 'non-tangible' innovations that often fly under the radar - those that require not much more than access to large databases, data manipulation creativity, and computational resources. And after the panel agreed that these are the next generation of agricultural investments, nearly every following discussion seemed to touch upon this theme. The nice thing about quantifiable data is that this can come from subjective sources, as well as those repeatedly tested in a laboratory. Given a long enough time series, a grower's logbook for instance, containing such information as to how a particular crop might respond to a particular weather pattern, the amount and type of pest fighting application that may have been used, and local market offers, all can be assembled into an index, which is another quantifiable data stream that users may have at their disposal.
And while upon first glance, one might suppose that these are closely guarded secrets, growers are probably one of the most supportive advocates of open access and data sharing, as what wiped out your neighbors crop a decade ago, may be the very thing that hits you this year. The potential for collaboration was evident to everyone. Looking ahead, I expect numerous high quality/high margin products to come to market which have their 'roots' in both the acquisition of new types of agricultural data (ranging from genomic to planetary weather), as well as in the repackaging existing data in an effort to (a) widen producer's margins, and (b) provide transparency on crop conditions, so changes in USDA crop yield estimates for instance (see below) do not come as a surprise and shock the market as we have seen in recent weeks.
As expected for a multi-day event, as the final day approached, a thinner audience resulted, but this certainly proved to be one more conducive for discussion and debate. The last day's discussions were moderated by Roger Berry (C Change Investments), who proved to be the most effective in both steering conversations to the interests of the audience, as well as generating more discussion among participants. It was good to finally see some environmental/biodiversity and true acute crop related issues discussed on day 3. As talks focused on the market today, the discussions were framed with some some history, which is absolutely important to understand if we are going to plan for the next 50 years with population movements and agricultural intensification. Berry even mentioned climate change and water limitations as decision points in investment decisions, which is oftentimes an afterthought to investors. Also, the new colonialism was mentioned, as a changing dynamic in the global supply chain. Not the usual talk at an agricultural conference.
The keynote speaker on the last day was the one who I wanted to hear the most: Dr. Gerald Bange of the World Agricultural Outlook Board which is the group responsible for the WASDE, always eagerly awaited every month by traders and analysts. Here were Dr. Bange's main discussion points:
- In his focus on C-S-W. In the WASDE, Bunge acknowledges limitations, particularly regarding supply-side estimates.
- He addressed the Russia wheat crisis this summer. Russia is exporting 18-20 mmt less than last year, and the only reason they were able to export 3mmt this year in light of the export ban was due to prior commitments
- Russian wheat imports also surged
- He highlighted importance of acute weather events, and the role they play in volatility in futures.
- He also said this type of weather event happens in Russia every several years (it doesn't).
- Regarding the US corn crop and USDA's significant revision downward on estimates, he notes that the US corn yield this year is not BAD (ie., not far from trend), just lower than previous expectations. *This is exactly what we told clients throughout the entire season this year.
- Looking forward, shorter crop coupled with early harvest places his agency's corn price estimate for the (2010/11) year at $5.20, with ending stocks moving down. USDA expects $7 corn for the same period.
- Ethanol: Oct production running at a record high. There is a 14 bln gallon capacity - this may be enough as US gasoline consumption is not increasing. Ethanol producers making around 28 cents/gallon, so there is an incentive to keep producing.
All in all, the week provided a very fruitful conference which provided food for thought on the train ride back to New York. Feel free to contact me if you would like to discuss any of the items discussed above in more detail.
Thanks to SeekingAlpha for providing access to the event.