CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT
31 December 2008
December saw something of a rebound in financial markets, with the MSCI World equity index gaining 9.3% and agriculturalcommodities 4.7%. The fund also performed well, returning8.9% in sterling terms. The main contributors to thisperformance were Syngenta (1.0%), Bunge (0.9%) and Viterra(0.7%). Laggards included Monsanto (0.6%) and AGCO (0.3%). The main news in the soft commodity markets was the Chineseannouncement that their corn harvest had been much better than previously thought in 2008, with production higher byaround 3%. As China is 20% of global supply, this alone issufficient to add 4% to global inventories. Furthermore, witheconomics for the US protein and ethanol industry poor,demand growth from these consumers has been reviseddownwards, with the USDA now expecting global graindemand to grow 3% rather than 3.3% in the 2008/09 crop year. Offsetting these two negatives to some extent is the newsthat a moderate La Nina weather pattern is causing very hotand dry conditions in Latin America, with the Brazilian harvestfor corn expected to be down by 10%, soybeans by 5% and Argentine wheat by almost 40%. The supply picture for the 2009/10 crop year is beginning tolook more interesting. Following on from the announcementthat FSU countries have seen declines of 7-8% in winter wheatplanting, we have learned that sowing in the US was also down9% on last year’s level. This is partly due to the late harvest, which gave farmers limited time to turn the land round beforethe cold weather came in, but also due to the less attractivemarket price of wheat. These two major wheat producersaccounted for over 25% of global wheat production in 2008,and with winter wheat accounting for over two-thirds of their combined production, total wheat acreage for 2009 is alreadydown by nearly 2%.Fertiliser markets have been frozen since autumn. Data fromthe Brazilian fertiliser agency ANDA showed consumption inOctober and November down as much as 35% compared withlast year’s figures. With customers at the farm and distributionlevel both unwilling to buy and limited on-site storage,producers have been forced to cut back on production. For example, Yara has temporarily shut down as much as 30% ofammonia capacity. Supply is also facing disruption caused bystrikes at plants in India and the impact of the annual Russia-Ukraine gas price dispute, which has forced a further 3% ofglobal supply out of the market owing to a lack of raw materials. With limited inventory held in the supply chain, prices mayrespond surprisingly quickly when farmers return to the marketin spring. Although farmers can to some extent play catch-up withfertiliser application later in the season, the industry will face alogistical challenge getting product to the farm. Fluctuations inregional gas prices have meant that upstream nitrogenproducers have migrated to low cost gas regions such asQatar, far away from key agricultural economies such as theUS and Europe who now import 25% and 40% respectively oftheir fertiliser requirements. Taking into account the non-existent start to the season and this logistical bottleneck, itlooks like consumption of nitrogen fertiliser globally might bedown as much as 10% in 2009. The yield implications of this will depend to some extent on who bears the brunt of thislower consumption. A marginal Brazilian farmer who uses 40%less fertiliser will see his yields fall much more than an Iowacorn farmer who decides to hold off on the last 10% of hisoptimal application pattern. But historical data suggests that a10% global reduction in use of nitrogen fertiliser could reduce yields by as much as 4-5%.
Stock Insight: Monsanto
We have recently increased the fund’s holding in Monsantosubstantially to 9.5% of NAV. Over time, one would expectseed companies to be at the forefront of agriculturalproductivity growth: if the total area of land cannot grow to keeppace with demand growth, it is imperative that we find ways ofincreasing yields on our existing farmland. Back in the 50s and60s, great advances were made in yields of crops like rice.Some of this increase came from the introduction of artificialfertiliser, but higher-yielding seed varieties were also vital.However, since the Green Revolution, with surplus food stocksgiving the perception that there will always be enough food togo round, the world has neglected to continue research in thisarea. Much of the money available to charities and state-funded research organisations was diverted to other, seeminglymore pressing, causes such as AIDS and cancer. As theresearch tailed off, so did the yield improvement, and yields inareas such as rice in Asia and wheat in Europe have noticeablyflattened out over the last twenty years.Research in areas such as chemicals and healthcare hasalways gone in cycles. Large pharmaceutical companies likeGlaxo and AstraZeneca produced a succession of blockbuster drugs through the 1990s using what could broadly be calledsmall molecule chemistry. But once the big opportunitiesopened up by that particular technology have been found, theindustry tends to stagnate, as big pharma has done over thelast decade. In a similar vein, agricultural chemical companieshad their last run of incredible return on R&D in the 1970s withkiller products like glyphosate, an all-purpose herbicide. By the1990s, companies like Monsanto were on the verge of givingup on what appeared to have become a commoditised, capital-intensive business.However, research into genetics has opened up a platform for the next cycle of commercial discoveries. Unfortunately for thepharma companies, concerns about genetic engineering ofhuman beings have made the application of this new
Leave a Comment