Home Beginner Market Structure Essential Components Of Agriculture Sector & Corresponding Investment Opportunities

Essential Components Of Agriculture Sector & Corresponding Investment Opportunities

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Introduction

Agricultural commodities are every-day eating crops. They are also animal produced and raised on farms or plantations. Agricultural products such as grains, livestock and dairy are a source of food for people and animals.

Some agricultural commodities are used as both foods and as an industrial ingredient. For example, corn is consumed by both human and animals, but it is an essential ingredient in fuel production.

Every living being is dependent on agricultural products. We need grains, fruits, vegetables and livestock. We build our houses from lumber, make clothes from cotton and manufacture cars with tires made from rubber.

Agriculture has created an impact worldwide by providing employment and finance. According to the Food and Agricultural Organization, the economic value of the agricultural industry is more than $3 trillion.

Different agricultural commodities

The most important and widely used agricultural commodities are:

Cereal grains – Cereal grains can be classified as:

  • Food for humans
  • Food for animals
  • Feedstock for fuels

These crops are also referred to as grain commodities. Depending on price and soil, farmers choose which crop to produce. Most of the grain commodities have a strong price relationship with each other. Commodity traders monitor spread between grain commodities to determine the price of grain.

Oilseeds – Plant fibres have a vast market in clothing and houseware industry. Farmers use the by-product from these crops in animal feed. This is the reason why oil seeds have a strong relationship with cereal grains.

Meat – Meat includes raising animals for organs, bones and hooves. The flesh of meat is also used for cutting and selling to people.

Dairy – Dairy commodities include milk, butter and cheese. Trading of these products started way back in the 19th century. Today, these products are traded on the Chicago Mercantile Exchange (CME).

Other soft commodities – Soft commodities are those commodities that are mined. That is why most traders classify cereal grains, oilseeds, dairy, and meat separately.

Commodity trading specification

What affects the price of agricultural products?

Many factors should be considered while investing in agricultural products:

  • Population growth
  1. World population is expected to exceed $9 billion in 20 years. When wealth is created among people, they migrate from rural areas to cities. Wealthier citizens mean more demand for agricultural products.
  2. To meet this demand, there needs to be innovation in irrigation, biogenetics and proper utilisation of land. This could also lead to investments in other sectors.
  • Agricultural produce-Emerging countries are growing at a much faster pace than developed countries. However, productivity in agriculture is lagging in these countries. The average growth rate is 1.73%, which is below the threshold level of 1.75% to keep up with global demand.
  • Technology 
  1. Technology is the biggest driver of productivity. Crop monitoring technology and mobile apps can assist farmers with advanced DNA testing of livestock.
  2. Farmers need to integrate the latest technology into their operations to boost growth. There is a skill gap between developed countries and developing countries.
  3. To reduce this gap, owners need to recruit educated and technology experts into the workforce. Investors can thus invest in both technologies that farmers use and in resources used to cultivate.
  • Demand from China (MEAT)-China is the largest meat consumer in the world. Meat consumption is increasing across the globe at a rate of 3 to 4% annually. This impacts the global agricultural markets. Hence countries are planning to invest in production plants of pork, poultry, and fish.
  • Global warming – The rise in temperature can dramatically reduce crop output and cause sudden surges in prices of agricultural goods. Farmers are learning to use heat resistant strains on crops. Here, investment opportunities are created in the area of biogenetics. This is a result of an increase in global temperature.

Leading Agriculture Indices

  • S&P GSCI Agricultural Index – This index provides investors with a reliable benchmark for investment in the agricultural commodity market.
  • Dow Jones Grains Sub-Index – This index comprises of three future contracts on grains traded on U.S. exchanges.
  • iPath Bloomberg Livestock Total – This index is composed of two livestock commodity contracts, which are the lean hogs and animals. These are traded on U.S. exchanges.

How to invest in agricultural products?

Investors who are willing to invest in agriculture can find additional information from the following sources:

United States Department of Agriculture (USDA)

The Economic Research Service (ERS) of USDA provides detailed research on agricultural products including production, consumption, import/export statistics etc… The ERS also analyses each agricultural sector and forecasts its future prospects.

Food and Agricultural Organization (FAO)

The FAO agency has 194 members and is present in over 130 countries. The FAO agency publishes report and statistics on broad topics of the agricultural sector. The database of FAO is an excellent tool for analysing and comparing agricultural data of different countries, their production, prices, land usage etc.

Trade groups

Industry websites are the best way to learn about different agricultural products. These groups inform and publish issues that may impact agricultural production. For example, the  National Pork Producers Council, National Corn Growers Association, International Rubber Study Group is a few among many.

CME

This American company is responsible for future and options trading in the exchanges. The CME daily publishes volume and open interest data for agricultural commodities. It has also started educational courses on agriculture commodities trading, trading tools, brokerages and more.

That’s about the Agricultural Sector. Do thorough research on each of the instruments before investing in them. Keep watching this space for more quality education. Cheers!

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