The agribusiness theme is one that can be intuitively understood because food and water are basic necessities. Unlike other industries or businesses where a host of factors must be analyzed when making investment decisions, in agribusiness, the most important factor is demand and supply conditions.
Population and income are two important factors underlying the demand for food and agricultural products. When a population grows, this drives a similar increase in demand for food and agricultural products. When the income of consumers rises, their food intake often tends to increase too.
Within developing countries, the lower-income population will likely consume more grains, while populations from the middle-income class spend more on meat and poultry. These two factors will cause the demand for agricultural products to increase.
Another interesting factor recently thrown into the agribusiness mix is increasing demand for biofuels. Biofuel has come under the spotlight, especially with the price of oil coming close to $100 a barrel at one point this past November. As corn and sugarcane are mostly used in the production of ethanol, this translates into greater demand for corn. This has had the knock on effect of increasing the prices of other grains used to replace corn as a feed grain.
Factors such as the above, have contributed to making agribusiness a very attractive investment. Funds investing in the agribusiness sector look at companies that operate at different points of the food chain. These include companies involved in the cultivation, harvesting, planning, production, processing, service and distribution of agricultural products (forestry and agriculture companies, tool and agricultural machine manufacturers), and companies in the food industry (such as wine, cattle and meat producers and processors, supermarkets and chemical companies).