Don’t overestimate wheat crisis, warn agriculture managers

Investors should not overestimate the effect of the Russian grain crisis, according to agriculture fund managers.

Henry Boucher, the manager of the Sarasin AgriSar fund and the deputy chief investment officer at Sarasin & Partners, says climate change, crop disease and dietary changes in emerging markets have a more important long-term effect on the asset class than events like the recent Russian drought and ban on grain exports.

“This is just a weather event affecting agriculture. In terms of its overall impact, it’s smaller and has been emphasised by the speculation in the market. In the future we are undoubtedly going to see more of this,” Boucher says.

Boucher says production stocks have gone up off the back of rising short-term prices

Agriculture investors have seen portfolios rise in recent days off the back of the drought and wildfires in Russia, which led the government to ban grain exports.

Boucher says production stocks have gone up off the back of rising short-term prices. This in turn has boosted tractor manufacturers and fertiliser producers, who tend to benefit from spending when producers’ revenues rise.

Parts of Boucher’s portfolio have also benefited from the rises, and he has considered taking profits in tractor stocks, for instance.

However, the manager observes emerging market importers have been better prepared for supply cuts than during price spikes two years ago.

“You don’t have the same sense of political panic,” he says. (article continues below)

Kristof Bulkai and Hugo Rogers, the managers of the Thames River Water & Agriculture Absolute Return fund, say grain prices are “currently too high to be sustainable” compared with price ranges from 2003-2006.

The managers are currently shorting wheat compared with corn, as wheat is a key constituent of Russian grain production and the managers eventually expect the spike in prices to die down.

Boucher says changes in emerging market diets and global climate patterns will have a more important long-term effect on grain production than droughts and fires, which he says are a periodic feature of the industry.

Fires in particular have a bigger impact on tree-based crops as trees take longer to grow back, he observes.

He points out crop diseases such as Ug99 can prove more widespread and persistent. Ug99 has already spread from Uganda to the Middle East, creating difficulties for grain producers.