Through disruption and distress one sector keeps winning.
Welcome to the reality of food’s greatest success story.
What other sector is so profitable with strong growing demand and constrained supply and over such a long period of time?
What other sector has all these performance advantages and yet historically has been ignored, denied or derided.
Investor Jim Rogers has pointed out previously that when they ridicule your idea you are probably on the right track. No wonder the organic market is looking so good.
The outperformance of the organic sector has been on-going for at least 16 years (arguably 20) and the compelling variables driving that performance are unlikely to change anytime soon. The global organic market even grew during the ‘great recession’.
From an investment perspective there have been regional and enterprise specific investment successes. These have been almost exclusively achieved by industry participants. Institutional investors have largely yet to take advantage of this investment theme in any significant size.
Recent US organic market news illustrates the strength of the sector:
- Whole Foods Market sales increased $3.7bn in the second quarter of 2016, largely driven by the rapidly expanding demand for organic food amongst American consumers.
- $43.3bn is spent on organic products annually in the US of which $39.7bn is on organic food.
- Organic in the US is projected to grow at an annual rate of return of 16% through to 2020.
- The overall US food market grew only 3% last year.
- Fruit and veg is the largest category with $14.4bn, representing around 13% of all fruit and veg sold in the US.
- Fruit, veg and dairy (the second biggest category) account for more than half of total organic food sales in the US.
- Dairy achieved sales of $6bn, a 10% increase on the previous year.
- On a global scale the market for organic, functional allergen-free and ‘better for you’ foods will reach a record $1 trillion in 2017.
All commodities have performed poorly in recent times, milk, cereals and other agricultural examples along with oil and other energy/metal commodities.
The organic class of commodities has continued to perform extremely strongly however.
Are investors positioned to capture the organic market’s outperformance?
Have investors considered how best to take advantage of the organic juggernaut or are they simply watching ‘orthodox’ agricultural markets underperform (in some cases quite significantly) and hope they ‘come right’ at some point?
We have on occasion heard investors articulate their disappointment with some commitments to the agri-sector thus far. Certainly a number of investors have expressed their dissatisfaction with the performance of the conventional NZ dairy sector. The flaw in these commitments is not so much the agri-sector per se but the strategy utilised.
Capture the Opportunity
Money is made in times of distress and crisis.
An example of a sector in distress is conventional dairy in NZ, which is currently experiencing a period of sustained poor performance. This distress combined with the success of the organic dairy market has created a window for acquiring assets at attractive prices. It is through the execution of an organic strategy that opportunity capture is secured.
Distress also comes via expanding pressure points such as climate change – drought, flood, pest/disease resistance, soil degradation, loss of farmland to urban expansion etc. These situations provide the environment for agro-ecological systems to outperform, delivering superior returns to investors.
History clearly demonstrates the consistently excellent performance of the organic market. This consistent market strength combines with superior productive resilience to position organic production as the agriculture strategy most capable of generating alpha.
But what does it take to successfully implement an organic strategy and capture the investment opportunity?
Team qualities required:
- Extensive experience of farmland transformation/conversion
- Depth of intellectual knowledge and understanding of agro-ecological systems and their (successful) functioning
- Demonstrable long term active involvement in the organic/ecological sector from which essential operational knowledge is gained.
The organic success story is long-term, growing and under-represented in an investment sense.
Lack of knowledge, the need for rare levels of management expertise and inertia have to date limited the ability of investors to take advantage of the outperformance available. The consistent strength of the market and its performance superiority to the conventional equivalent is becoming increasingly obvious and this reality is challenging even the most entrenched inertia.
Farmland is by its nature a long-term asset and organic management the clearest path to capturing alpha.