February 19, 2007

 

Agriculture fund see high grain prices to weigh on livestock sector
 

 

Grain, oilseeds, coffee and cocoa all show upward price potential, product manager for Schroders PLC's (SDR.LN) Agricultural Fund Christopher Wyke said.

 

"Agriculture is the best risk reward opportunity today," said Wyke.

 

Based in London, Schroders long-only, research-driven, agricultural fund was started about three months ago with investment now reaching $120 million.

 

Despite this season's already sharp price hike in corn, Wyke said demand for the grain continues, particularly with its use in ethanol production.

 

"You have to remember corn is coming from very depressed levels," Wyke said. "They are lower than at the end of the (American) Civil Wartaking into account inflation."

 

He also said demand for corn is "to some extend non-elastic," pointing out that people are still going to eat and livestock producers can't just stop feeding their animals.

 

In addition, biofuel production, including corn-based ethanol, doesn't have "a lot to do with economics," said Wyke.

 

Biofuel production, particularly ethanol, is undergoing a rapid expansion as governments look to reduce their dependence on imported oil, added Wyke.

 

In his recent State of the Union address U.S. President George W Bush called for U.S. use of alternative fuels to reach 35 billion gallons in 2017. This compares with the record output of nearly 5 billion gallons of ethanol produced in the U.S. in 2006.

 

But just like in the dot.com boom of the 1990's, Wyke said that the biofuel bandwagon is about picking the winners and losers.

 

He said that as farmers increase plantings of corn, this will mean a drop in soybean area, which will increase the upward risk for that market. Meanwhile he looks for high grain prices to weigh on the livestock sector.

 

Wyke likes prospects for Potash Corp. of Saskatchewan Inc., the world's largest fertilizer business in terms of capacity. He said is because corn requires more fertilizer than soybeans because the fund also invests in agriculturally related equities,

 

In the softs subsector, Wyke also sees upward price potential for coffee and cocoa due to increased consumption, especially in developing countries.

 

Wyke said upward potential for cocoa stems from an expected global supply/demand deficit in 2006-07, continued dryness in major producers Ivory Coast and Ghana, worries over a scarcity of high quality cocoa beans and solid demand.

 

Schroders also has a general commodities fund with exposure to metals, energy and agriculture which was launched in October 2005. However customer demand for more exposure to agriculture prompted the launch of the new fund.

 

"Our agriculture fund is, we believe, the only long-only agriculture fund in the world," said Wyke.