Global Agribusiness Is A Good Diversification

Food shortages and high food inflation have emerged not just as India-specific problems; they are global problems that will only intensify in the years to come. And shortages, as we know, spell investment opportunities. DWS Investments has recently launched a fund-of-funds called DWS Global Agribusiness Offshore Fund. Its underlying fund, DWS Invest Global Agribusiness, invests in a wide range of agribusinesses - the entire food chain and in almost every business allied to agriculture. During a recent trip to India, William Barbour, Director and Investment Specialist at DWS Investments, made a strong pitch for the fund. His key arguments: agribusinesses offer a great opportunity currently, and they will allow Indian investors to diversify their portfolios, given the paucity of investment options belonging to this theme within India. Excerpts from an interview with Sanjay Kumar Singh:

What are the key drivers of agri-business globally?
There are five main factors driving global agribusiness. The main ones apply very much to India as well. The first is rising population growth: we are growing at the rate of 80 million people a year. We will grow from 6.8 billion currently to 8 billion people over the next 10 years. We are also urbanising rapidly and living longer, all of which are creating more demand for food.

The second and most exciting development from Indians' perspective is rising wealth in the developing world. When people earn around $1,000 per capita annually, they spend most of it on food and shelter. India's per capita income has now reached a tipping point. After this people here will spend more money on more food and better-quality food. In much of the developing world there is also shift to a higher-protein diet from a predominantly cereal-based diet. In India the government also has schemes going to help the poor. It is offering guaranteed employment schemes that have helped low-paid workers move from one meal a day to two meals a day. All these factors are creating demand which in turn is causing prices to rise.

Added to this is the fact that we have a limited amount of agricultural land. The world actually lost agricultural land last year because of urbanisation and encroachment by deserts. On a per capita basis we are witnessing a serious decline in the availability of farmland per person. It was 0.5 hectare per person in 1950 and is expected to decline to 0.2 hectares by 2020. This would translate into a decline to almost one-third within one lifetime.

Then there's the issue of biofuels. If more land is used to raise biofuel crops, then there will be less land available for the cultivation of food crops. The use of biofuels has been enshrined in the legislations of many countries, which means that more land will be devoted to these crops.

Besides we have the vagaries of climate change and global warming to contend with. Over the long term this is a big cause for concern for agriculture. Agricultural land will be lost as rising temperatures cause ocean levels to rise and productive areas become more arid. Perhaps the fact that the Indian monsoon failed last year is a sign of climate change. The fact that in Delhi it is 5 degrees hotter than normal is also possibly a sign of climate change.

Because of all these factors food prices are rising around the world.

Are water shortages also expected to affect agriculture in future?
Countries like India, China, Australia, and many others all have significant water-related problems. Dramatic increases in the irrigation of crops across northern India have substantially depleted the region's groundwater. Between April 2002 and August 2008, aquifers in the region lost more than 54 cubic kilometres per year. The entire region from Afghanistan to Delhi all the way down to Bangladesh is witnessing a depletion of groundwater resources. These aquifers took millions of years to fill and we are depleting them in decades.

I had spoken at a seminar in China a couple of years ago. After my presentation a Ministry official conceded that China will only have 70 per cent of its freshwater needs by 2020.

So water shortage is going to be a significant problem for agriculture. Clearly companies that can help solve these problems - those that operate in areas such as purification, recycling, desalination, and so on - are of interest from an investment point of view, depending, of course, on valuations.

Specifically, what are some of the investment opportunities that this fund will look at?
We will invest across the food chain. We will invest in companies that provide inputs for the farm - seeds, fertilisers, equipment and machines - to those that handle the output - storage, trucking, marketing and distribution. So this is a very broad theme. We will invest in everything starting from the seed all the way to the consumer's plate: plantation companies, palm oil companies from Malaysia, Australian agriculture companies, even those engaged in the purchase and sale of land, water-related companies, companies that provide credit to agriculture, and so on. Companies engaged in distribution, such as Olam International of Singapore, which is run by some very entrepreneurial Indians, would fall within the target group. Going further downstream, we could invest in supermarkets, food manufacturing companies, and even in restaurant chains such as McDonalds.

As you can see, this is a diverse and attractive theme with as many as 33 sub-sectors that offers a fantastic opportunity.

Will you also look at biotech companies?
Yes, that is another interesting investment opportunity. Biotech is going to be very useful in increasing crop yield. I'm aware that BT brinjals have created controversy in India. If you use these genetically modified seeds that are resistant to pests, then the need to use pesticides gets reduced. Over the longer term we do need to use products from these biotech companies. Let me give you an example. Monsanto is working to produce crops over the next decade that have double the yield while using half the water that they need at present. These innovations will allow us to farm more arid areas.

Are there any Indian companies that you could potentially invest in?
There is Jain Irrigation, and Mahindra & Mahindra which are in our investment universe.

Why should an Indian investor invest in a fund such as this?
Indian investors will have difficulty investing in agribusinesses here in India because the investment universe here is very small. You have got about 68 per cent of the workforce employed in agriculture producing about 17 per cent of the GDP. Therein lies the difficulty. It is very difficult to commercialise agriculture with so many people in the villages engaged in it. Otherwise you could aggregate land holdings and have mechanised farming. Because of these problems you do not really have a corporate agribusiness sector. The dairy industry for example could provide opportunity but your biggest dairy entity, Amul, is a cooperative and not listed on a stock exchange. There are some smaller sugar and tea companies but most of India's agriculture is still owned privately. For Indian investors, this fund offers an opportunity to diversify into a global theme to which exposure is not available domestically.

What is the benchmark for this fund?
We don't have a benchmark. We compare the performance of this fund against the MSCI World Index.

Without a benchmark how does the investor evaluate this fund?
Most investors around the world want diversification in their portfolios. Indian investors think differently because your markets fetched very good returns last year. But you can't expect an 80 per cent return every year. Clearly that is impossible. Most investors around the world want to see how their portfolios have done vis-à-vis the MSCI World Index. Indians don't think that way. They want to know how their portfolios have done vis-à-vis the Sensex or the Nifty. You could compare the fund's performance to that. Then there is the DAX Global Agribusiness Index. This did not exist when we thought of this fund. Ours was the first agribusiness fund in the world. Investors could compare this fund's performance to this index as well.

How has the fund performed since its inception?
The fund was started in November 2006. Since then it has outperformed the MSCI World Index by almost 9.5 per cent per annum. But because of the global share market crash the compounded annual return is only about 4.5 per cent. The return from the MSCI World Index is negative over the same period.

Looking forward, we expect the MSCI World Index to give a return of 10-12 per cent per annum. Since inception in November 2006, our fund has returned more than 9 per cent per annum above the MSCI, although there is no guarantee we can deliver that in the future. We would like to think that we will perform in line with the Indian stock market over the next three years or so. Our portfolio has a valuation of around 12 times earnings, the MSCI World Index is trading at about 14, and the Indian stock market is at around 18. The lower valuation also makes our fund an interesting diversification play.

What is the expense ratio of the underlying fund and the feeder fund?
The feeder fund will have an expense ratio of 0.75 per cent per annum, which is in line with Sebi regulations. The expense ratio for the underlying fund is about 1.75 per cent per annum.