The Smart Move of Investing in the Boring Agriculture of Frontier Markets

frontier markets investment - egg farm

 

Ask investors about agricultural investments and invariably most of them will think about big US corporation, like Monsanto, or agrotech start-ups looking to revolutionize the world.

Investing in industrial agriculture or in innovation has been a smart move over the years.

Industrial agriculture vs agro-tech startup

However, these two type of investments have their limits. Industrial agriculture tends to behave more like a commodity market, influenced by global economic trends. Whereas agrotech, like the most start-up scene, is risky and can’t offer economies of scale, yet. Also, agrotech is more concerned with proving concepts and R&D, rather than making a profit.

OK, so when I can invest in big US corporations dominant in the agricultural sector, why should I look to invest in frontier market agriculture?

The big US companies offer limited opportunities, and consumers in frontier markets are not eating only food staples so to get an exposure to their food spending habits we need to look elsewhere.

Although I won’t be focusing on specific companies, it is important to understand that there are a lot of opportunities in investing in frontier market agro-business.

 

Take these factors into consideration for a sound investment in frontier agro-business.

Firstly, the rising income in these markets means that consumer spending shifts away from buying staple food to more protein rich diets. Pattern observed in more mature emerging markets when consumers’ expendable income rose.

Whether or not US companies like it this is still a local business. Grains and other commodities can be shipped long distances, but you won’t see chicken wings Made in China at your local supermarket. Also, fresh produce offers another logistic headache, making it hard to ship over long distances.

Investing in businesses near the final consumer is becoming more profitable. Recently, RusAgro, a Russian company made headline news with its $250 million investment in a hog farm in Russia where it will be close to China, one of the biggest pork importers.

Agriculture is simple Investing 101. Is simple, but not easy! It is risky too, due diligence is required as usual. But, by being easy, it means that the business model usually is straightforward. Warren Buffett said that you should always invest in businesses that you understand.

Another aspect that makes agricultural businesses in frontier markets a good investment is the low-cost labor. Farms are capital and labor intensive. After input costs, labor is the second biggest cost to farmers. Investing in farming in a low-income country, makes it more cost effective and profitable.

 

Why frontier markets farming in not a fashionable investing sector? But is boring and profitable

When looking for investments in emerging or frontier markets, investors tend to emulate the behavior of their domestic markets. Usually, this is a good habit, as they are looking to invest in sectors that are proven to offer good returns. But if a sector is not fashionable is disregarded.

They neglect farming because there isn’t a local equivalent in rich countries that they can think of. But due to the characteristics mentioned above, farming in frontier markets is a different business than in the rich world.

 

Why is investing in boring agriculture a smart move?

One simple reason is the market share for these local producers. The market share acts as a monopoly shielded away from the competition of big US or European players.

Agriculture and farming may not be the most fashionable sectors to invest in. But given the rising income in frontier markets, the local nature of the business and its cost structure, the boring agricultural sector is worth following in the coming years.

 

All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.

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