Last week, I took part in the Naked Short Club, a radio show on London’s Resonance FM that blends agriculture, hedge funds, poetry and psychedelic music. The program’s eclectic menu and the colorful introduction of our host – who goes by the name of Dr Stu – should not fool you: the treatment given to the topics du jour is generally rather serious. This time, agriculture came under examination – and it offered an opportunity to diagnose a few misconceptions.
The first is that investing in agricultural assets is mostly a commodity play. On the show, we looked back at a peculiar year (1976) during which silver prices seemed to move in lockstep with that of soybeans. The theory then held by traders was that silver, perceived as a great inflation hedge, was simply reflecting “the ebb and flow of inflationary movements inherent in soybean prices,” according to a New York Times article of that year.
That theory unraveled a few months later, confirming what sensible observers suspected: the markets for soybeans and silver react to fundamentals that have little in common (climate vs mine production, changing diets vs industrial usage). That is even more apparent today: geopolitics – in the form of China’s retaliatory tariffs on American soybeans – are disrupting global food markets. Latin American beans have become dearer than US peers, while metals remain low. Placing ag and hard commodities in the same bucket makes little economic sense.
That’s even truer of private real assets: they are one more step removed from commodities markets, and they can be leased out to generate a stable income. Capital expenditure, meanwhile, can help you add further value. That helps explain why, despite low soft-commodity prices overall, fundraising by private ag vehicles is accelerating.
A second shaky idea is that farmland prices have a floor under them because the planet is facing an imminent food shortage. The reality is more complicated. Right now, you could in fact argue that the world has too much to eat: bumper wheat harvests, for one, are depressing prices. That’s in no small part because large producers have come back online, most notably Russia, which has gone from net wheat importer to largest exporter in the space of two decades. Land prices in Kansas – formerly known as the world’s bread basket – have dropped as its relevance is questioned.
But what about the medium to long term? The world’s population is growing, and the planet’s stock of farmland is finite. Yet, trying to predict when a global food shortage will arise is not particularly helpful. While the Earth’s population is growing by roughly 1 percent annually – the equivalent of one Germany every year – food production is rising at about the same pace. Aggregate demand and supply are closely matched. What the world no longer has is a significant margin of safety – which is why it makes more sense to think of food markets as increasingly volatile, rather than necessarily doomed. Most investors trying to time “peak food” are unlikely to get rich. Figuring out when things might fall off-balance for a while – on either side – is probably a more lucrative exercise.
A third common shortcut concerns modernity. For food production to continue to rise, agriculture needs to become more productive – year after year. Some say there are big gains to be made, because farmers have yet to embrace digital technology. Others say it’s likely to be a grind, because farmers are slow to adopt new tech. Both assertions are inaccurate. Farmers, at least in the rich world, are already fairly tech savvy; they can also be quick to adopt technology, if it improves the bottom line. Productivity will improve not because those farmers finally turn digital, but because tech itself continues to make strides.
If you don’t believe me, try to tune in to specialist podcasts tracking agtech, of which there are a few. Yes, they tend to feature less wavy tunes than psychedelic fare. But they’re living proof that the future of ag is already being nurtured in the fields.
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