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Crop Yield Investing - Real Socially-Responsible Investing

With the world's population projected to increase from 7.3 billion people in 2015 to 9.8 billion in 2050 (UN Projections, 2015) and rising standards of living, feeding the human race over the next few decades, and beyond, is expected to be a significant challenge. From 2005-2050, global demand for calories and proteins derived from crops is expected to increase by 100% and 110%, respectively[i], and more than 80% of this increase is projected to have to come from increasing crop yields (Fig. 1). However, based on current trends, increasing crop yields are expected to fall far short of what is required. For example, the global average rates of yield increases have been just 1.6%, 1.0%, 0.9%, and 1.3% per year for maize, rice, wheat, and soybean, respectively, while 2.4% per year is what will be required[ii]. What this means is that, in absence of any significant increases in crop yield growth, there could be severe global food shortages over the next few decades (Fig. 2).

A common question is whether one solution would be to simply increase the amount of arable land under cultivation. However, this is not a significant possibility due to a number of factors (e.g. environmental, lack of remaining land), and most estimates call for a small 10% increase through 2050. Therefore, a growth in global crop yields may be vital to avoid an agricultural crisis, preserve the environment and ensure food security for future generations.

Achieving the required yields is critically dependent on two factors: closing the "yield gap" that currently exists between different crop-producing regions, and successful R&D into yield-enhancing techniques. A yield gap is when yields are below the potential yield achievable through a complete utilization of available agricultural production technology, and is currently prevalent in Asia, Eastern Europe and Africa. Closing the yield gap by bringing yields to just 75% of their potential would increase annual crop production by 28%, while bringing it to 95% would increase it by 58%. (Footnote 1)

Another major action required to meet the world's growing demand for food is to invest in the research and development of techniques that will lead to increasing crop yields overall. In this area, there are a number of companies that are working with genomic techniques to create improved seeds and plants that will not only produce more food, but will also be hardier, require less fertilizer or pesticide and, in some cases, deliver more nutrients to those who consume them.

Increasing Crop Yields - A Socially Responsible Value Investment Opportunity

There are a currently a number of publicly-listed companies with a focus on seeds, fertilizers and genomic techniques that many investors may find interesting. Globally, the commercial seed market is expected to grow from nearly $45 billion in sales in 2013 to $93 billion by 2020, a nearly 11% annualized growth rate (Fig. 3). Leading companies such as Monsanto (MON: NYSE), DuPont (DD: NYSE), BASF SE (BASFY: OTCMKTS), Bayer AG (BAYRY: OTCMKTS), Syngenta AG (SYT: NYSE) and Dow Chemicals (DOW: NYSE) are some of the key players which are focused extensively on improving crop yields and have significant R&D capabilities (with R&D investments averaging more than 10% of sales over the last decade).

The capability of these companies to deliver increasing yields can be validated by the growth of genetically-modified ("GM") crops since commercial introduction in 1996. GM crops have been scientifically proven to improve crop yields substantially while reducing carbon emissions and the costs associated with pesticides and fertilizers. Currently, GM crops account for nearly 80%-90% of corn and soybean production in North and South America, and comprise nearly 35% of global market share in commercial seeds (Fig. 4).

With the support of governments and policymakers around the world, investing in these companies is a unique opportunity for investors to capitalize on what is expect to be a long-term growth opportunity while also increasing food security and reducing the negative environmental aspects often associated with farming and crop production.

How to Invest

While there are a number of funds available to investors interested in the Agriculture sector in general, up until recently there was not a single fund focused on the increasing crop yield opportunity. This changed on December 21, 2015, when the First Trust Indxx Global Agriculture Index ETF (FTAG: NASDAQ) began trading. The ETF seeks to track the Indxx Global Agriculture Index, a market capitalization weighted index designed to measure the performance of companies which are directly or indirectly engaged in improving agricultural yields. The index is comprised of farmland companies and firms involved in chemicals & fertilizers, seeds, irrigation equipment, and farm machinery. As of December 15, 2015, the index consists of 45 constituents, with 31 of them focused on improving crop yields.

For more information on the index, please visit http://www.indxx.com/globalagriculture.php

[i] "Global food demand and the sustainable intensification of agriculture" by Tilman, Balzer, Hill and Befort (October 12, 2011)

[ii] "Yield Trends Are Insufficient to Double Global Crop Production by 2050" by Ray, Mueller, West and Foley (June 19, 2013)

Additional disclosure: Indxx has developed and licensed IGAI Index for use as the underlying index by FTAG.