The investment opportunity in agriculture

Funds Management

by Tim McGowen

Agriculture is one of the oldest asset classes in the world and is the fundamental support beam of the global economy. Investing in the food and agribusiness sectors requires an intricate level of understanding of crops, livestock, geographies, and complex value chains that encompass inputs, production, processing, and retailing. The sector has historically been less sensitive to economic downturns and is considered to be an essential service to produce essential goods. Hence, the sector exhibits a comparatively lower correlation to the overall stock market but is positively correlated to inflation, making the asset class a good inflation hedge. The AgFood Opportunity Fund's investments are biased towards the production, processing, and retailing of essential goods that are generally found under the consumer staples umbrella, with growing exposure to agtech, plant-based biotech, and natural capital.

Tim McGowen:
We're talking to Paul Jensz today, who is the Executive Chairman of AgFoods. AgFoods identifies undervalued investment opportunities, both locally and globally, in the listed and unlisted space in the food and agricultural sectors.

Paul, welcome to the network. In the agricultural space we've really seen some strong performance, regardless of what's happening around the world. We've got geopolitical tensions in Europe, we've got inflation, we've got volatile equity markets. And we've also got, of course, supply chain issues. Now, can you talk through the opportunity in the agriculture sector. It's got a low correlation to the equity markets. It's been a strong performer in the past. Can you talk through where the opportunities are?

Paul Jensz: There's massive opportunity in the agricultural sector. Essentially, we're going to be growing the population by sort of 30 per cent in real terms in the next 20 years. And, inside that, we've got a massive growth because we've got the developing countries want a higher protein diet because parents essentially want their sons and daughters to play sport. And what we've seen in China the last 20 years is that led to a massive increase with the number of protein in diet, with dairy, red meat, and white meat, and particularly pork up there. So, that's the opportunity. It is protein, but it's got to be sustainable, and it's got to be scalable. So, they're the areas to grow. And protein's probably growing at 4 per cent protein per annum. If you can pick those that are sustainable, those that are proactive with the way they do it, we can see companies that can grow at 10 per cent per annum underneath.

Tim McGowen: And, Paul, can you talk through your investment philosophy in regards to the AgFund you manage. How do you select companies for the portfolio?

Paul Jensz: The main areas we focus on are that protein area, the branded area and agriculture. And we don't mind the alternative protein space as well if it's sensible. And what we're trying to find is we're trying to find scalable niches that have got defendable barriers and can grow sustainably. We look for proactive managers and we also look for groups that look at capital preservation. So, they look after their balance sheet, they generate cash flow.

Tim McGowen: And how many opportunities do you look at in this space per annum?

Paul Jensz: About a hundred a year in serious DD. Probably 200 come through the door, but a hundred of them we put through the process. We hold about 20 to 25 on our portfolio. And about half of those are going to be unlisted and half of those will be listed companies.

Tim McGowen: And can you talk through some listed examples that are held within the portfolio at the moment?

Paul Jensz: Well, in the listed portfolio, we found a very good branded company that was listed, a company called TasFoods (ASX:TFL). It's got very strong brands down in Tasmania with Nichols Chicken, Better Milk, Pyengana Dairy and Cheese, and Meander Valley cheese. So, some very well-known brands in Tasmania. And so we are backing that group to grow scalably. They've now got some capital that they've raised, end of last year. So, that's one of the listed companies that we think in that protein space is going to grow very well with strong brands, Tasmania to the rest of Australia.

Tim McGowen: And what are some of the other listed brands held within the portfolio?

Paul Jensz: Listed brands, well, the strong brands we think are groups like Elders (ASX:ELD) and Ridley (ASX:RIC). So, these are brands that have recovered, particularly Elders since 2014, going from a dollar to $12 a share. Ridley, in the animal feed space, has gone from a very small position to now being number one independent player with 21 per cent market share. And they've doubled in share price in the last 18 months.

Tim McGowen: And, of course, what investors can't get access to is the unlisted exposure that your agricultural fund holds. Can you give us some examples of some of the unlisted names?

Paul Jensz: Well, what we love is one group out of Canada. In fact, a group called Crush Dynamics where they take wine waste and make a flavoursome product that goes into alternative proteins, be they meat patties and sauces and that sort of alternative protein area that needs a bit of a revamp because there's a lot of rejection with texture and flavour and high salt at the present time. So, Crush Dynamics is moving its operation in part into Adelaide and Victoria. And we are a big funder of that group as they grow here in Australia and do what they've done in Vancouver.

Tim McGowen: And does your exit strategy with those unlisted companies become when they become listed, or is there other ways to… A trade sale, for example?

Paul Jensz: Well, both of those examples there, Tim. We both have… I suppose it's our timeframe that's a bit different from… You've got venture capital, private equity, typically have a five- to seven-year timeframe. Institutional investors would have a six- to 12-month timeframe. Ours is a two- to three-year timeframe. We think post farm gate they're the sorts of timeframes that can have a measurable improvement in productivity improvements, cashflow generation, and make use of that proactive management style. And in that two- to three-year timeframe, be it a trade sale or a list where we're happy with either…Typically if it's a trade sale, we'll invest by a convertible note. If we know there's going to be an IPO, we can invest directly in the equity.

Tim McGowen: Paul, thanks for your time.

Paul Jensz: No worries at all, Tim. Thank you very much.


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