Speaking to Citywire Global, Govan, who runs the Baring Global Agriculture fund, said he has opened two 1.5% positions in China Modern Dairy and Indonesian agri-food company Japfa over the summer.
‘Chinese dairy has grown significantly over the past ten years. Demand for milk products has increased considerably. In the long term, this trend is likely to increase given the changes in Chinese dietary habits,’ he said.
Govan added Japfa has investments in Chinese dairy products as well as Indonesian chicken seeds. ‘Being a Muslim country, Indonesia has a very low level of meat consumption. Chicken is cheaper than other meat to produce and is becoming an interesting structural theme.’
Elsewhere, Govan has upped holdings in the timber industry, notably in the Canadian companies Canfor, which he bought in June, and West Fraser, both of which are 2.2% positions in the portfolio.
‘These companies will benefit from the ongoing house recovery in the US. They also expanded in China during the global financial crisis,’ he said.
The timber sector as a whole seems particularly attractive to Govan given scarcity in the market. ‘The mountain pine beetle is literally eating up the forests in British Columbia. As a consequence, timber has a constrained supply and a strong demand.’
The big shift
Govan said changes in the fund have been relatively restrained in 2014 compared to a year before when he took advantage of a bumper crop, notably grain and edible oil.
‘In September 2012, because of the US drought, crop prices were very high. Back then, our exposure to upstream companies [those benefitting from the soft commodities backdrop] was up to 69%,’ he said.
In 2013, Govan changed his allocations following the grain and edible oil record crop. Govan cut exposure to upstream companies from 69% to 44% and increased his weighting to midstream companies from 25% to 45% of the fund.
‘Midstream companies benefit from increasing volumes and cheaper costs, so, the 2013 record in production, as well a better operating system, prompted us to act quickly,’ he said.
Govan explained that upstream firms include hydro chemical, edible oil and agriculture machinery companies. On the other hand, he said midstream businesses are linked to processing and distribution and benefit from an increase in commodities’ volumes.
Currently, the fund has a 41% exposure to midstream companies and a 44% to upstream businesses.
Looking towards 2015
Govan expects a moderate rebound in crop prices in 2015 given the current, unsustainable levels of corn and soybean values. He also thinks midstream companies will continue to do well, along with fertilisers and seeds’ businesses.
On the other hand, he is cautious on agricultural machinery, as he thinks farmers could look to reduce expenditure to save money.
Over the past three years to the end of September 2014, the Baring Global Agriculture fund returned 34.11%, one percentage point more than the DAXglobal Agribusiness index.
Source: CityWire Global