The Energy Report: Is investing in agriculture like investing in any other commodity, or do investors new to the space need to get familiar with special considerations?
Tom Wallace: Agricultural investment is composed of a multitude of subsectors, so when it comes to making an investment decision, investors need to focus their efforts. Agricultural investment encompasses everything from a sheep and beef farm in New Zealand to a phosphate mine in Brazil. We’re talking about very different operations that come under the same banner of agriculture, but some cross into other sectors. Obviously, fertilizer is directly related to agriculture, but a phosphate mine, for example, is part of the mining sector as well. You have those considerations to take into account.
The fundamentals that support growth in agricultural commodities are different from those of other commodities for a number of reasons, the main one being that people have to eat. You don’t need gold bullion. It’s great to have some to protect yourself from the actions of central bankers, but you don’t need gold to live. Everybody needs agriculture, so agriculture tends not to correlate with other assets like stocks or bonds. Those considerations are important.
Source: The Agletter
TER: What risks are inherent in agriculture investing?
TW: After we first acknowledge that the two greatest risks to investors are 1) their own herdlike actions and 2) the actions of government, we have systemic risk. That incorporates wild cards like weather, and disasters like a plague. Given that the majority of the world’s agriculture is conducted by small farmers, these risks have far-reaching consequences.
We also have market risk, especially in emerging countries. We have the cyclical and seasonal price fluctuations of agricultural products, and government meddling with import and export restrictions. A current example of that would be the ludicrous sanctions that Western governments …read more