Q&A: William Barbour, Director, Deutsche Asset Management

'Agri product prices to ease in 2011'

William (Bill) Barbour, investment specialist, APAC & MENA, for Deutsche Asset Management, who manages its DWS Global Agribusiness Offshore Fund which has assets worth $3 billion, spoke to Jitendra Kumar Gupta on various issues regarding global and Indian agri-commodities, including the trend in prices, opportunities and outlook, and Indian markets. Edited excerpts:

Indian markets have corrected in the recent past. Is it time to buy?
I think people were worried about interest rates and inflation and that has probably started to be priced in. The consensus view is that RBI (Reserve Bank) might increase interest rates by 75-100 basis points over the next 12 months. The correction has been good for investors, making Indian markets relatively more interesting. This should eventually bring foreign investors back to India. In the long term, Indian markets should do better than most global markets. However, India faces a period of high inflation, rising raw material stocks and demand for higher wages, which will put pressure on company earnings and may lead to more volatility in the coming months. Is it the bottom? I simply do not know. It is certainly a better buying opportunity than what it was four-five months ago.

 

Is liquidity driving global food prices? Do you think investing in agri-businesses can be rewarding?
We have seen a massive rise in global food prices, also in India, over the last seven months. Money printing is just one part of the trigger. The key thing remains population growth. Global population is going to be 8 billion by the end of 2020 as against the current 6.9 billion, which means 80 million new mouths to be fed every year. On an average, we are living longer and there is growing urbanisation. So, we simply need more food every year.

Instead, we have run down global grain inventories for over two decades. This is also a reason to the lower inventories, supply-side shocks are created, causing food prices to be volatile.

What is causing the recent surge in prices?
Over 2010, the world has had to deal with a lot of supply shocks. Typhoons in the Philippines resulting in a loss of 2.5 million tonnes of rice, droughts in Russia, Ukraine, Brazil, Argentina, bad monsoons in Punjab, floods in Pakistan. Recently, we have had floods in Australia, from the highest rainfall recorded there in 200 years. All this has resulted in a huge rise in commodity prices. Also, given that we are faced with global warming and climate change, these supply shocks would be frequent, causing prices to rise.

What are the other long-term drivers?
The most important is the rising income of the developing world. Wall Street analysts do not seem to get this. Half the population on the planet is in the income group of under $1,000 a year, moving up to $3,000-5,000 a year. It is important because if you just earn $1,000 a year or less, you spend almost everything on food and shelter. But as income starts rising from that level, the first thing these people will do is to buy more food, better quality of food, for their families, and in much of the world shift to higher protein diets. This is the actual thing causing more demand for food.

Do you think these prices are sustainable?
The recent rise in prices is abnormal. What you should expect is for prices to be rising in a linear fashion over the long run because of these demand factors. But from the near-term perspective, 2011 is probably going to be a year when prices of agriculture commodities could ease and revert to their longer term rising mean, which is good news for India.

What is causing the Indian food inflation?
About 150 million people moved from one meal a day two years ago to about two meals a day presently. It is a wonderful thing that these people have got more food, but this has also led to huge price inflation because the demand has gone up. In India, something or the other goes wrong with a particular crop almost every year, which causes volatility in prices. However, one needs to understand that, globally, we had a lot of under-investment in agriculture for decades. If you look at the number of people to be fed over the next 35 years, the UN has calculated that it is going to take $9.2 trillion investment in agriculture to turn that around (annual investment of $210 billion versus current rate of $120 billion). The only country that has done well in this respect is China. India had a green revolution during the 50s and 60s; you need to keep that going.

How have you placed your portfolio?
We are currently invested from upstream companies close to the farm, which may include seed, fertilisers, pesticides and farm equipment, to the downstream companies that include distributors, food packaging companies, logistic providers, forestry, retailers and product manufacturers. We move up and down the entire supply chain, based on the changing dynamics and the valuations. Right now, we are moving into the downstream companies, as the prices of agri-commodities could soften in current year. The companies in the downstream could perform better as margins improve. We have already started to move out of fertilisers. We like seeds, supply chain, distributors and food retailers.