Emerging Markets, ADB annual meeting, Madrid, May 2008

Investment products and practices that seek to benefit from rising food prices are under increasing scrutiny as a partial source of those rises, putting food affordability out of reach of the poor.

More and more mutual funds and structured products are being launched based on agricultural themes, either buying the stocks of food-related companies or taking bets on soft commodities such as grain and corn. Some funds have gone further and set out to purchase farms, cattle stations or even just vacant land.

For example, in Australia alone yesterday two new agricultural investment products were launched. JP Morgan launched a vehicle called Trio, which among other things exposes investors to the JP Morgan Commodity Curve Index, an agricultural benchmark; and Macquarie added a well-established agribusiness mutual fund, the DWS Global Equity Agribusiness Fund, to its Fusion Funds range.

Opinion is divided on the impact. “I think it is certainly making it worse,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors. Alongside the impact of weather, crop failures, food for fuel and rising income levels, he believes speculation and investment approaches are significant impacts. “Speculative activity in food markets has become particularly evident in the last six to 12 months fuelled by strong fundamentals for food prices and uncertain equity, credit and property markets,” he says.

“Basically traders and speculators flocked to commodities including food this year as it was one of few investments still providing solid returns.” He said the emergence of food as an asset class “will provide a strong structural underpinning for food prices – which is not good for people living in emerging countries.”

The allure from an investment perspective is clear. “The demand for soft commodities is really just beginning to increase and we believe the opportunities here are quite considerable,” said Chris Larsen, managing director of DWS Investments. “Including agricultural investments within a portfolio can provide several benefits including increasing its growth potential and lowering risk through diversity.”

The DWS fund invests in listed securities such as Archer Daniels Midland, Syngenta and Monsanto, an approach less likely to push up food prices than food stocks. But other funds make direct investments in farms. In June Macquarie Bank launched the Macquarie Pastoral Fund, which owns and operates beef cattle and sheep production properties in Australia. Tim Hornibrook at Macquarie said the fund would exploit increasing disposable incomes in Asia that are likely to translate into more consumption of red meat and therefore higher prices for beef exports. Hedge funds including UK-based Odey Asset Management, US commodity fund Ospraie Management have bought farms, while a Agriculture Fund launched by Blackrock has purchased a large area of land in Norfolk, UK, all of it likely to contribute to an upward momentum in food or agricultural land prices..

ADB President Haruhiko Kuroda told Emerging Markets: “You cannot explain by simple demand-supply conditions the huge, phenomenal increase in rice prices in the last four to five months.” But he added: “It’s not hoarding by a big company or hedge fund, it’s people trying to purchase rice sooner rather than later because of potential price rises.”

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