Prospects for the fund appear more than promising, especially with food prices recently showing signs of heading nowhere but up.
"Food prices, as a percentage of disposable income, have been in decline for probably 200 years. We believe that we will all be paying more of our disposable income for food in the future," says Barbour.
Nik Bienkowsi, Head of Listings and Research at ETF Securities, says fundamentals are supporting food prices. "We've been lucky with food prices over the medium- to longer-term," he says.
Forecasting the future of food prices has historically been an agronomist’s job, but now economists are just as concerned about it. There is a new phenomenon that they are keeping close tabs on: agflation.
Coined this year by Merrill Lynch, agflation refers to the recent rise in food prices worldwide. The increase is a result of rising demand for human consumption and for use as an alternative energy resource.
The issue that has triggered a lot of agflation concerns is fuel substitution. Crops such as soybeans – and especially corn – are used in the development of biofuel.
"We're seeing increase in tastes and demands that we've never seen before, [and] new sources of demand such as ethanol," Bienkowsi says. "The EU and the U.S. governments are both subsidizing ethanol production. And if the current targets are met by the year 2020, we're going to see that 60% of grains production is going to fuel, and not food."
Meanwhile, Barbour says the increase in prices is not a cyclical matter anymore. "There are four secular forces in play: population growth, growing incomes in the developing world, a limited supply of agricultural land, and competition for land from biofuels," he says. "These forces cannot be stopped by a credit crisis or rising interest rates."
At the rate things are going, food prices are expected to rise and demand will show no signs of waning. The United Nations says 80 million new mouths need to be fed every year. A lot of them will be from China and India, where rising incomes correlate with rising protein intake. The scramble to meet demand has never been so great, and investors willing to take a swipe at agribusiness plays could end up with a hearty dish.
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