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ETF Deep Dive: FOOD
The investment thesis for food is well understood. By 2060, the United Nations predicts the global population will surpass 10 billion people. With today’s total at 7.7 billion, that’s roughly 60 million more mouths to feed each year.
But only recently has the food become a major talking point in the market. Russia’s invasion of Ukraine highlighted the fragility of supply chains. The two nations combined provide considerable global exports of wheat (28%), barley (32%) and sunflower (74%). Malaysia this week stopped chicken exports citing rising inflation. The United States has an infant milk formula shortage. And Indonesia only recently lifted a ban on palm oil exports.
With food supply under immense pressure, prices have subsequently increased rapidly leading to agriculture companies going through somewhat of a purple patch. And with no imminent solution to the shortage insight, one way to capitalise on this opportunity is via the BetaShares Global Agriculture Companies ETF (ASX: FOOD).
The ETF follows the Nasdaq Global ex-Australia Agriculture Companies Hedged AUD Index. That’s quite a mouthful but put simply it follows the biggest global agriculture companies outside of Australia. All companies must be from the agriculture or farming-related sub-sector of the Revere International Sector Classification. Then each company is ranked by market capitalisation, and the top 60 are included. The weighted-average company size is $45 billion, which is on par with companies in the ASX 20 like Telstra Corporation (ASX: TLS) and Wesfarmers Ltd (ASX: WES).
Investing in FOOD is much more than owning farms and fresh produce. From a sector viewpoint, Fertilizer & Agriculture Chemicals (32.6%) is the biggest weighting followed by Packaged Foods and Meats (25.7%). Agricultural Products (16.1%) and Agricultural & Farm Machinery (13.6%) round out the top four, showcasing the full value chain of growing and delivering food into the hands of customers.
FOOD is still a relatively small ETF, with just $117 million in assets. The management fee is also at the upper end at 0.57% per annum. An investment of $10,000 would result in $57 in fees deducted each year. The ETF is hedged, meaning movements in exchange rates won’t affect the performance of the ETF. But keep in mind the underlying companies will still be exposed to currency movements.
Geographically, FOOD is heavily concentrated in the United States (59.9%), with smaller weightings in Canada (9.9%) and Japan (9.3%). This doesn’t necessarily mean the companies are focused exclusively on that region. Most companies have global operations and are therefore exposed to several markets and regions. For example, US-based Corteva Inc (NYSE: CTVA) and Deere & Company (NYSE: DE) derived 52% and 42% respectively of their revenue from international markets.
Of the aforementioned 2.3 billion extra people by 2060, all will be born into what is currently considered developing nations. In fact, the population of developed countries will fall marginally over that same period. Given most of the holdings are in developed markets, it’s possible that these companies do not benefit from the big population shift. Somewhat offsetting this outcome is that developing nations will likely rely on existing chemicals, technology and machinery from developed markets to grow their own agriculture industries.
Another potential downside of FOOD is that it omits some quality agricultural companies in Australia like Elders Ltd (ASX: ELD), Graincorp Ltd (ASX: GNC) and Costa Group (ASX: CGC). Finally, agricultural companies are notoriously cyclical and therefore prone to booms and troughs. While rising prices are great for food companies currently, investors shouldn’t expect forecast food inflation into perpetuity.
Overall, FOOD does what it says on the tin. It provides exposure to a diverse basket of the largest companies in the food value chain around the globe. It’s suitable for a tactical allocation in the portfolio and will act as a hedge against potential agricultural inflation.
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