The fact that agricultural commodity prices have risen very sharply in recent months does not mean that investors should expect an equally harsh decline. The precarious balance in the global chain keeps prices high. This offers opportunities for investors.
So says portfolio manager Stéphane Soussan of the 1.6 billion euro CPR Invest - Food For Generations fund. Agricultural commodities are one of the sub sectors in which the fund invests. CPR is a subsidiary of Amundi.
Recent months have shown how precarious global supply chains are, especially in energy and food sources. “Wheat and corn prices are now twice as high as the average of the last ten years,” Soussan told InvestmentOfficer.be.
Strong demand from China
However, this movement has already started in 2020, due to strong demand from China. In 2018, the Chinese pork population was decimated by an epidemic. It then had to be rebuilt and fed, putting pressure on soya or maize prices, he explained.
Russia’s invasion of Ukraine made the problem even more acute, as both countries are major exporters of wheat, maize and vegetable oils.
This has supported the agricultural sector on the exchange, as producers now have a clear incentive to produce at maximum capacity and invest more in farm machinery and seeds. “As long as the conflict lasts, I think prices will remain high and it will take at least two years before the current market backlog can be cleared.”
Food chain
The CPR Invest - Food For Generations fund has been in existence since 2017 and invests in the entire food chain, from stocks exposed to agricultural production to the restaurant sector. “The food industry will have to meet the needs of a growing number of people, as the world”s population is expected to reach 9.7 billion by 2050,” said Soussan. “At the same time, the pressure on agricultural land and drinking water resources is increasing. So we will have to produce more, with a more sustainable approach.”
One of the factors supporting this long-term theme is population growth in emerging countries, with rising living standards leading to changing eating habits. At the same time, health and well-being are also food trends that are beginning to permeate the population, and which are particularly benefiting producers of plant-based proteins or food supplements.
More circularity
“In addition, the food industry needs to become more circular to avoid further deforestation, with development in precision agriculture to limit the use of fertilisers to where they are really needed, or in the use of cardboard packaging that can be more easily recycled,” Soussan said.
Finally, he also points out that one third of the world’s food production is currently wasted, so there are also development opportunities to improve supply chain management.
Since the beginning of the year, the fund has reduced its exposure to e-commerce - home delivery - whose often unprofitable business models have come under further pressure from rising interest rates. “The slowdown in the Chinese economy has also prompted us to reduce our exposure to emerging markets,” noted Soussan.
Cyclical
CPR Invest - Food For Generations invests in six sectors, three of which are naturally more defensive (linked to food consumption), and three more growth-oriented (linked to the water sector or precision agriculture). Since launch, the fund has posted a relatively robust annualised performance of 8.6 per cent, with lower volatility than its benchmark.
“This sector composition allows the fund to behave more resiliently and less volatile than the market, as the more defensive sectors are slightly more prominent in the fund. This defensive profile gives us the flexibility to position the fund according to the cycle.”
Since the beginning of 2022, the fund has limited its decline to 12 percent, which compares favourably with the evolution of major stock market indices such as the S&P500 (-20 percent) or the Euro Stoxx 50 (-19 percent).
For the coming months, Soussan believes that the risk of an economic recession can be offset by the more defensive sectors of the portfolio, such as food retail and manufacturing. These account for almost 50 percent of the portfolio’s assets under management. “These expenditures will be reduced relatively little if the business cycle falls,” he said.
This article originally appeared on InvestmentOfficer.be.
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