Can agri be defensive?

On Monday evening, as I was about to embark on a train from Bordeaux to Paris, a violent storm hit the coast of Western France. Inaugurated last year, the €7.8 billion high-speed train line linking the two cities is known for being a rare instance of a French rail project financed by private parties (including two fund managers). Kickstarted in the 2000s, the scheme stayed on track despite economic and political turbulence. This week, it also survived climatic events – despite power outages in Bordeaux, I reached Paris without problems.

LGV SEA, as the line is dubbed, says much about what has allowed infrastructure to evolve into a full-fledged asset class: a resilience to adverse circumstances, with some leeway for investors to shoulder extra risk, should they wish to (LGV SEA, a massive greenfield project, is a racier proposition than your classic toll road). As 2018 opens, it’s worth pondering whether agriculture also has what it takes to withstand unexpected storms. Could worse-case scenarios, should they materialize, thwart agri’s rise to the mainstream?

The new year is beginning on a promising foot. In both developed and emerging markets, economic growth is gathering pace. Recovery is even visible in regions, such as Western and Southern Europe, that it had eluded in recent years. All this is feeding into strong consumer demand for food and agricultural products across the spectrum. As technology allows emerging countries and sectors to leapfrog stages of agricultural progress, new markets will open for institutional investment. In turn, another wave of agtech champions will become attractive targets.

At the same time, agriculture is finally demonstrating its worth as an asset class to cautious LPs, potentially opening a flow of fresh commitments to dedicated managers. “Today, farmland investments are potentially at a double inflection point, in terms of both return potential and significance for investors,” Detlef Schoen, head of real assets at Insight Investments, told us in a recent outlook piece. He reckons the primary benefits of the asset class – low correlation to both equities and bonds, and an “inflation hedge with return” – are now better understood.

These characteristics may come in handy. Agriculture is facing two major dangers in 2018, none of which are easy to predict or quantify. First, like private markets at large, it is experiencing significant inflation of its own: the search for yield has made the safest assets more expensive, pushing capital towards operating models and higher-value markets like permanent crops. But even there asset values are rising. It would be a shame if a lack of affordable opportunities were to turn off potential investors too soon, making agri a victim of its own success.

But things could also go the other way. As the global economy accelerates, central banks will further embrace monetary tightening. Not everyone is sanguine about potential consequences. “Since very few investors are solely focused on this industry, a key question will remain whether the global party continues, lest ag investing takes a back seat as more pressing issues elsewhere in the portfolio consume investors’ attention,” noted Jim Budzynski, managing principal of MacroGain Partners, in another outlook story last week. A hard landing could see institutional capital decamp to more established classes.

In between those two scenarios, however, lies of lot of space – and potential remedies. By tying itself up to the broader real assets category, agriculture may be better positioned to weather capital flight. PSP’s recent decision to form a tie-up with Australia’s Blue Sky to target that segment provides an example of such developments; so do other mandates we expect to hear about in the coming months. Similarly, strategies that tap into less transient investor needs, like sustainability, may be more immune to changing winds. But perhaps the best protection is not about reinventing the wheel – while 2018 bears good hope for agri, the year’s most important keyword may well be diversification.

PS: On behalf of the Agri Investor team, best wishes for 2018! If you’d like to read more about what the new year has in store, feel free to click here to access our full Outlook series, published last week.

And if you’d like to let us know your thoughts, please send us a note at matthieu.f@peimedia.com.