Agriculture can effectively meet the needs of investors seeking the benefits of diversification and an expansion of the efficient frontier of their portfolio.
Even a modest exposure to the asset class can accomplish these objectives. This is best accomplished through a highly diversified exposure to the asset class, one where the investor is exposed to the production of a broad range of foods across multiple geographic locations and ultimately, that food and fiber being consumed by a wide variety of end markets.
The incremental addition of agriculture can meaningfully enhance total portfolio efficiency by improving the risk-adjusted return profile due to agriculture’s historically low correlation with other asset classes, its resilience during periods of volatility and its inflation hedging characteristics.
These are common reasons why allocations in agriculture are increasing among institutional investors. Periods such as the global financial crisis, covid-19, or the inflation spike and bear market of 2022 are recent events where agriculture has proven to be a very beneficial asset class to hold.
Diversification in agriculture also plays a critical role in mitigating some of the inherent risks in producing food and fiber such as commodity price movements, trade regulation changes and, of course, the weather. Diversification provides the simultaneous benefit of mitigating core risks while providing investors with the clearest exposure to the salient benefits of the asset class (low correlation, inflation hedge characteristics, limited downside risk).
Crop exposure
What this looks like when done proactively is an exposure that is truly diversified across a wide range of perspectives. It is an oversimplification of the asset class to define diversification along the lines of annual row crops versus permanent crops.
Inherently, many crops move together, and the parlance of commodity price diversification fades rather materially when crop exposures are narrow. This relationship is perhaps clearest when looking at the relationship between grain and oilseed prices, for example.
Exposure to a broad basket of commodities that benefit from a limited correlation among themselves is critical for true risk mitigation and further enhancing the salient benefits of the asset class. Commodities like olive oil, cherries and canola inherently have a low correlation with each other and offer true risk mitigation.
There is no substitution between these products at the production or consumption level, and in fact, the type of buyer for each of these commodities is inherently different as well. The Fiera Comox Agriculture Strategy offers material exposure to nearly 20 commodities, many of which benefit from negligible relationships amongst themselves.
Geographic diversity
The benefits of geographic diversification are perhaps clearer to define and easier to assess. Weather is an inherent risk in producing food and undertaking this activity in a broad range of locations reduces the volatility in overall outcomes.
Within a single farming business, capturing geographic diversification while maintaining operational sensibility can be a challenge. The possibility of dyssynergy of scale can offset the benefits of geographic diversification in a single farming business.
When viewed across a broad portfolio, however, an investor can gain this benefit without sacrificing what makes sense operationally. The Fiera Comox Agriculture Strategy is invested in five different countries and across a broad range of regions within those countries. Within each of our farming partnerships, there is a geographic focus that ensures strategic focus and operational sensibility.
End market selection
End market diversification is a critically important and perhaps underappreciated aspect of diversification in this asset class. Recent history has more sharply put this risk in focus. Serving a diverse range of end markets, or, at a minimum, having the economic ability to do so, is critical risk mitigation in the production.
Again, what may be challenging within a single farming business is more effectively accomplished within a broad portfolio. Effectively serving nearly every major market in the world provides offers strong risk mitigation against sudden changes to the trade dynamic between any two trading partners. In addition, having the ability to pivot and economically serve different end markets is equally important.
Although diversification extends beyond the elements above, they provide a useful framework against which to evaluate an agricultural exposure. A more global portfolio offers investors multiple layers of diversification and risk mitigation, which are otherwise easily obscured by oversimplification.
Matthew Corbett is a partner, agriculture, at Fiera Comox.
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