The Investment Case for Food and Agriculture

As populations have grown and geopolitical as well as climate-related concerns have risen, food security has become an issue of vital importance for the global community. Against that backdrop, Daniel Stanley, Director, ETF Distribution, Institutional & Advisory, BMO ETFs, makes the case that food and agriculture should join Consumer Staples and Discretionary as key components of investor portfolios.

“There is no finer investment for any community than putting milk into babies.” – Winston Churchill, 1943

It comes as no secret that food and shelter are basic needs for human existence, both elements having dominated Canadian social commentary recently due to rising living costs. Food and its production and distribution have been one of the most divisive issues in human history. Rising populations, a changing climate and geopolitical concerns about food security are three fundamental issues which underscore why food and agriculture should be considered a primary sector of interest for investors, much like Consumer Staples and Consumer Discretionary. Those three themes — demographic, environmental, and economic — make agriculture a vital component in portfolios.

Demographics

There are many reports that evaluate an anticipated rise in demand for foodstuffs as the world population expands, but perhaps the most glaring example of its importance is that the United Nations has classified No Hunger as its 2^nd Sustainable Development Goal, just after No Poverty.¹ A 2021 study predicts food demand will rise 35-56% by 2050.² The same study cites the remarkable increase in food studies, reflecting the degree to which people are realizing food security is a critical component of modern societies.

Total (Cumulative) Number and Types of Global Food Security Studies Per Year

Source: van Dijk, M., Morley, T., Rau, M.L. et al. ​“A meta-analysis of projected global food demand and population at risk of hunger for the period 2010 – 2050.” Nat Food 2, 494 – 501, 2021.

Needless to say, increased demand for food is inflationary; the well-understood relationship between supply and demand means that, absent an increase in supply, rising demand will push prices higher.

Environmental

So much has been written about the impact climate change has had and will continue to have on food production. Weather patterns are changing, causing more severe storms and drought in some areas, while lengthening growing seasons in others. Add in habitat loss and species extinction, and it is clear there will be an impact on agriculture, which is likely to raise prices. 

Economic

Food inflation in Canada has been much discussed in national media, but it has been a global phenomenon. Politicians are correct to point out that food prices have gone up, and according to BMO Economics, ​“there is little chance of a serious about-face (in food prices) ahead. The nearly 25% jump over the past few years is unfortunately destined to be more-or-less permanent.”² Just look at this index of Agricultural Product prices going back to 2015:

Commodity Indices and Forecasts
(US$ Terms: 2023 = 100)

Source: BMO Economics, as of February 7, 2024.The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 20 commodities key to Canadian exports. Weights are each commodity’s average share of the total value of exports of the 20 commodities during the period 2012-21.

A global pandemic, the breakdown in globalization, and geopolitical events have all exerted upward pressure on food prices. 

The Investment Case

Investors have long recognized the investment benefits in Consumer Staples (STPL – BMO Global Consumer Staples Hedged to CAD Index ETF), and Consumer Discretionary exposures (DISC – BMO Global Consumer Discretionary Hedged to CAD Index ETF), but the BMO Global Agriculture ETF (ZEAT) deserves equal merit. Food production and its subsequent consumption is not discretionary, but because it is not one of the top sectors in the S&P 500 or TSX, investors have tended not to integrate it into their portfolios as much as sectors like Technology, Financials, Health Care, or Energy. 

ZEAT is a Canadian-listed, Canadian-dollar-denominated ETF that holds 30 companies in global agribusiness. Each company is selected from a Global All Cap universe and must have at least $500mln in market cap. 

Importantly, the companies are screened and weighted for quality based on EBITDA (earnings before interest, taxes, depreciation, and amortization) margins, with companies ranked in the bottom quartile excluded.

ZEAT’s emphasis on quality earnings, its low cost (management fee of 0.35%), and its Canadian domicile combine to make it a compelling solution for Canadian investors wishing to incorporate the strong investment themes global agriculture has to offer into long-term portfolio construction. 

To learn more about ZEAT or receive other trading insights, reach out to your BMO ETF Specialist at their email address.

¹ ​“The 17 Goals.” United Nations Department of Economic and Social Affairs.

² van Dijk, M., Morley, T., Rau, M.L. et al. ​“A meta-analysis of projected global food demand and population at risk of hunger for the period 2010 – 2050.” Nat Food 2, 494 – 501, 2021.

³ ​“Commodities Standing By For Rate Relief,” BMO Economics, February 7, 2024.