September 5, 2015

Desmond Sheehy Co-Founder & Chief Investment Officer Duxton Asset Management

Duxton’s approach to investing into agriculture has been shaped and developed by practical application over the last 8 years. In this time we have invested for our clients over USD 400m across the agricultural value chain in a number of different markets and many varied structures. To achieve this we have had to kiss many frogs so have seen most of what is on offer out there.

Agriculture focused investments offer their own unique challenges over and above other investments and any potential investor needs to understand the risks they are exposing themselves to. The potential of these investments has been written and spoken about for a long time and I don’t have the space to enter into these here. However, now with the approaching inevitability of a crisis in food, more and more investors are looking at this sector. These investors range from pure financial investors to those more focused on food security. Then there are those with whom we like to work with who see an opportunity to invest in a social and environmentally sound manner to generate market returns.

When I speak about the inevitability of a food crisis I am not talking about a worldwide famine – at least not for a long time – but there will come a time when the world realises that if all things stay equal we will run out of food. Whilst we are producing more, we are consuming more and we have a very small margin of error between stocks on hand and daily usage. We are dependent on global supply chains which are dependent on both politics and weather. I fear for the world to truly listen and understand the dangers, there will have to be localized food shortages. A small war, bad weather in the wrong place at the wrong time is all it takes.

However, there is a simple solution – investors and operators must feel they can get a return on their investment of capital, time and labour – today that return is not sufficient to attract the needed investment to prevent this crisis. This is a supply and demand issue. It is not a simple issue of growing more. We have inefficiencies in the logistics of bringing farm produce to market where I have seen figures that 30-40pc is lost. We grow crops inefficiently in sub-scale farms with no collective support or community partnership.

Simply put what is needed to generate this return is higher prices paid for food along the value chain – not squeezing one end and abnormal profits elsewhere. A lower farm gate price will not encourage farmers to grow more. It may force consolidation but will not increase investment. It will not encourage schemes to develop small scale farmers into sustainable operations reducing rural poverty. A lower price for the distributor and supply chain won’t encourage the needed investments in refrigeration and logistics. It is not just in the developed world where this is an issue – in Australia we estimate that 40-50pc of the strawberry fruit production is thrown out because it does not meet a visual specification. This could be used to produce Jam for example that turns a waste product into a valuable product and needless to say which we are now helping this company to do.

The urban world fears higher food prices as it means they have to pay more for food. I would make two observations on this. Firstly, higher food prices will do more to lift people out of poverty and build sustainable rural communities in every country in the world from Australia to Zimbabwe by creating viable, sustainable and profitable agricultural businesses which provide good wages and investment returns. More of the world poor live in rural environments than anywhere else.

And secondly the old adage holds true – the cure for high prices is high prices. Food prices can never go high for too long. However, the market needs to find a fair equilibrium – not the one that exists today – where we have the rural poor subsidizing the urban population food costs.

But what does that mean for investors today. The global agricultural value chain is inefficient and often broken. Without higher food prices and without the expectation that there will be higher prices it is still an investment universe littered with opportunities to improve efficiencies, make better use of resources, innovate, reduce waste etc. By making such actively managed investments, very good investment returns can be generated as well as improving the prospects of all the stakeholders.

We have already seen this in our investments in India, Vietnam and Australia to name just a few and are excited about Africa, The key to financial return is in good project selection – finding the princes not the toads – strong committed partner (financially and track record), buying well, solid business plan with options, pricing power and an understanding of the operating environment. Also a willingness to adjust when things don’t go according to plan. All that said there is not enough capital available for agriculture to prevent the coming crisis – all we can do is to position ourselves to play a role in alleviating it when it happens and ride the Beta dragon – in short now is the time to invest in Agriculture.
Desmond Sheehy is a member of the speaking faculty at GAI Asia in Singapore, September 22-24, 2015.

The opinions expressed in this editorial are the author’s own and do not reflect the views of GAI News.