Feed the world and make a profit, says BlackRock agri manager

Growing demand from developing countries for a Western-style diet means demand for crops and grain will also rise for the foreseeable future, according to BlackRock’s Richard Davis.

The manager of the firm’s BGF World Agriculture fund, launched in February this year, says demand is currently outstripping supply as the world’s population increases and developing countries like China begin to consume more protein, beef-based, diets.

‘Many people may think that as these countries move away from a grain based diet to a protein based diet demand for grain will drop - this is not the case,’ says Davis, who co-runs the $55 million fund with co-manager Desmond Cheung.

‘Farmers need more grain for a protein diet and as people become wealthier they will have to grow substantially more crops to feed the animals,’ says Davis.

It takes over 8kg of feed to produce just 1kg of beef, according to his data, and demand is set to gather momentum over the next decade as Brazil, India and China improve their diets. But despite this emerging market focus, the fund's portfolio has a heavy bias towards North American firms.

According to Cheung, as the emerging markets have to buy produce from western firms to grow their crops, investing in North American firms will prove fruitful. So he is investing in companies such as Canada-listed Potash Corporation, which does a large proportion of its business in emerging markets .

‘If China alone is to reach the diet consumed by Korea, it would translate into 27.4% growth in demand for meat and fish for the country, representing a 9.2% world growth,' says Davis.

This will also translate into farmers buying more equipment to enable them to increase their production levels which will bolster returns for one of his top holdings, machinery producer John Deere. Investors will benefit from all aspects of growth in the agriculture industry as the fund invests in all the different sub-sectors, from farming infrastructure to food processing.

‘If farmers do not increase their supply in the long term we will see significant rises in food inflation. Food security is becoming more and more of an issue today.

‘As we know, we are only three meals away from anarchy and if you don’t give the people food, they will do something about it.’

The managers also believe that as demand for biofuel grows it will lead to eventual land expansion which will support farmland prices and in turn increase demand for grains and arable land.

‘Many people don’t agree with [biofuel] as they think it’s setting fire to food, which it is, but it's in government legislation.’