Wheat woes spell good news for agri investors

High wheat prices and potential global shortages of the world’s main staple could provide short-term benefits for investors involved in the agri business, says BlackRock agriculture specialist Desmond Cheung.

Wheat prices hit a two year high on Wednesday following a major drought in Russia and a number of wildfires which decimated a large quantity of its crops. The world’s fourth biggest wheat producer has since announced it has reduced its wheat production forecast for this year by almost 20%.

As the CBOT September wheat futures index rose above $7.30 a bushel, the UN’s Food and Agricultural Organisation (FAO) called for calm.

'The world wheat market remains far more balanced than at the time of the world food crisis in 2007-08 and fears of a new global food crisis are not justified at this point,' said an FAO spokesperson.

News of the high wheat prices were greeted positively by Cheung but the BGF World Agriculture fund manager also sounded a note of caution to opportunity-seeking investors.

‘Many people will be considering investing in an agriculture fund on account of the high price of wheat,’ said Cheung, who co-manages the fund with Richard Davis. ‘But one thing we try to stress to investors is to try and build long-term value.’

Despite the long-term focused approach of many agri funds, the market will potentially yield some shorter term returns as more investment is poured into infrastructure and production means.

‘A higher grain price is definitely good news for farmers. It allows them to buy more fertilizer, equipment, and many of them could be facing a better year. If the grain price continues to go strong farmers will need to buy more products.’

The fund has a limited number of holdings in Russia and so far Cheung says they appear not to have been seriously impacted by recent events. He also believes many companies in the world’s main wheat producing countries, the US, Europe and Canada, could also step up investment and production as bids to avoid a global wheat shortage are intensified.

‘All in all it’s good news for these companies but it does not mean that we need to increase our investments in Russian companies to capture any future gains.’

Reports of a possible ban on wheat exports in Russia and trade restrictions and other major producers could, however, add more volatility to the market in the short-term according to Cheung, but add more weight to his long term conviction on the sector.