Market Overview
(The following comments and information refer to the funds underlying model portfolio, all figures stated
are measured in USD). With earnings season winding down during the month of May and a very differentiating performance
between soft commodities the DWS Global Agribusiness strategy managed once again to beat the
broader equity market. A variety of segments contributed with stock performance up around 20%
including fertilizer producers in emerging markets, agribusiness related infrastructure providers, meat
producers and also ethanol related names. The losers included tractor producers in emerging markets
due to rising material costs and inflation. Sugar related exposure got hit by a 12% decline in sugar prices
during the month of May. Amongst soft crops sugar and wheat were the losers with about 11%, pork
bellies, hogs, tuna and chicken adding between 15% and 25%. Still, on these higher levels many of the
protein producers are loss making, but the reversal of falling meat and chicken prices should continue
going into the second half of 2008. A clear disciplinary capacity reduction by the producers will be
necessary to achieve better results.
We have seen several companies in the supply chain management (SCM) segment raising capital over
the last couple of months. Companies including ADM, Viterra, Olam and ABB secured a total of more
than three billion USD for several purposes. We would expect consolidation among the top 15 global
SCMs. Valuation has been lagging for this group, compared with our universe. The ownership of scarce
production and infrastructure assets makes this business model attractive and unique. Although we
usually tend to challenge mergers and acquisitions, we think the supply chain still has to gain scale and
breadth to deliver even more efficiency within the value chain.
On the political side the discussion about biofuels, food scarcity and agflation heated up towards the start
of the FAO conference in Rome in early June. Regulatory investigations into trading, speculation and
hedging as the source of rising soft commodities and oil ended inconclusively but left a slightly negative
sentiment in total. Interventions by regulators into the financial industry have to be viewed carefully and
could have a long term impact on participating groups and prices. Several comments ahead of the FAO
meeting suggested exactly our stance on the sector: it is not all about one specific part of the value chain.
In his 10-point plan for tackling the food crisis, Robert Zoellick, president of the World Bank Group, writes:
“… Fifth, there needs to be more investment in agribusiness so that we can tap the private
sector’s ability to work across the value chain: developing sustainable lands and water; supply
chains; cutting wastage; infrastructure and logistics; helping developing country producers meet
food safety standards; connecting retailers with farmers in developing countries; and supporting
agricultural trade finance.” Sounds familiar? The other nine points include references to crop insurance, increase in research spending to reverse
historic underinvestment, and removal of export bans. Not only does this short article (A 10-point plan for
tackling the food crisis. By Robert Zoellick, May 29 2008, Financial Times) reflect our thoughts from the
beginning of the launch of the product that the story is not only about fertilizer and crop protection, it also
indicates that solutions could take more than 5 years to overcome global inefficiencies. If one assumes
that we are also only about half way through the cycle of the soft commodities’ boom, the DWS Global
Agribusiness strategy will have ample investment opportunities in the future.
Performance Commentary Positive performers in absolute returns for the month included:
Noble (33.9%), the raw material supply chain manager, saw its shares reach an all-time high on news of
a coking coal discovery by Australia’s Gloucester Coal Ltd, in which Noble owns a 20% stake, followed by
news that Noble’s first quarter 2008 sales more than doubled while profit more than tripled on strong
demand for commodities. Revenue for the company’s agriculture division rose 87%.
Bagfas (30.2%), the Turkish fertilizer company, is benefiting from rising fertilizer prices. The company,
which manufactures and sells fertilizer, has been among the best performing fertilizer stocks in 2008.
Aventine Renewable Energy (28.0%), the US producer of ethanol, recouped some of its losses on
margin concerns amidst rising corn prices, after the US House of Representatives passed the Farm Bill.
The bill includes measures to support the development of the ethanol industry, including the extension of
the current import tariff to protect domestic producers. Frutarom (26.4%), the Israeli flavor and fragrance company, posted strong first quarter results with sales
increasing 52% to $122 million. Margins improved as the company passed higher raw material costs
through to customers. The company, which acquired several companies in 2007, plans to continue
making acquisitions as it aims to reach $600 million in sales by 2009.
Marfrig (26.2%), the Brazilian meat processor, reported strong profit growth in the first quarter, resulting
in upgrades to the stock. The company, which is the fourth largest meat processor globally, also reported
a 59% increase in exports despite restrictions by the EU on Brazilian beef imports, as the company was
able to ship to the EU from its operations in other South American countries. The company’s shares were
further supported by increasing conviction that meat prices will rise substantially. Negative performers in absolute returns for the month included:
Greencore (-19.8%), the Irish food company and the world’s largest packaged sandwich producer, fell
after the company forecast significant raw material inflation leading to total input costs rising 10-12% in
2008. The company’s 37% increase in first-half profit failed to boost the stock as the increase was driven
by a one-off payment related to the company’s exit from the sugar business and investors focused on the
outlook.
Consolidated Water (-16.5%), the developer and operator of water production and distribution systems,
reported disappointing quarterly results with profits falling 50% due to a loss from a contract dispute.
Revenues were flat compared to the prior year. The company’s management stated that it does not
expect the contract dispute to impact the overall outlook for 2008.
Tata Motors (-16.2%), the Indian machinery company, declined as Indian stocks were hindered by
concerns that inflation and high oil prices would lead to a deterioration in the Indian macroeconomic
environment. Tata Motors was further hindered by reports that the government will stall production at a
plant where the company plans to produce its recently announced mass-accessible Nano car. In addition,
the company reported a decline in fourth quarter profit due to higher steel costs and announced plans to
issue equity to fund its purchase of Jaguar and Land Rover.
Mahindra & Mahindra (-16.0%), India’s biggest tractor company, declined as Indian stocks were
hindered by concerns that inflation and high oil prices would lead to a deterioration in the Indian
macroeconomic environment. The company reported a decline in fourth quarter profit due to higher steel
costs and said it expects raw material inflation to continue to put pressure on profits.
Turk Traktor (-15.6%), the Turkish agricultural equipment maker, fell after the company reported a 17%
decline in first quarter profit due to higher production costs and operating expenses.
Investment Strategy and Outlook
In June we will have to digest the outcome of the FAO meeting in Rome. Several working groups have
been formed and could influence government’s positions on the agribusiness sector. On a micro level we
follow recent negative developments around the UG99 virus for wheat in several African countries and
have to evaluate the likelihood of this so far incurable crop disease spreading to other regions. The
Midwest planting situation also worsened for another month. Although planting crops these days is only a
matter of days not weeks anymore, the wet weather in the Midwest leads to replanting and affects the
maturity of the crop. We might see another switch into soy at the expense of corn.
After the phenomenal run of fertilizer stocks we continue to investigate the seed business and are
analyzing how much a discount in valuation should or should not be. The function of price per yield
increase is getting more favourable for seeds. The global farmer only needs about 5% of his costs for
seeds whereas the fertilizer inputs now make up anywhere between 25% and 30% of costs, potentially
depressing the farmers’ balance sheet if crop prices stagnate. Read Full Document
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