MexECON Blog

Why Agriculture?

Terra Nova is particularly interested in agricultural companies primarily because of their demand and supply environment. Quite simply, we expect that global demand for agricultural products will increase strongly in the coming years, while the supply of agricultural land and labor in many countries will be constrained.

On the demand side, the most obvious source of opportunity is population growth, especially in the most rapidly-developing large countries. Based on data from the International Monetary Fund (IMF), annual population growth during the last couple of decades has averaged 2.8% in Saudi Arabia, 1.6% in India, 1.3% in Brazil, and 0.7% in China, not to mention the 1.0% growth rate in the United States. All of these new people want to eat, and as long as agricultural products can be traded internationally, agricultural producers around the globe should see increased demand for their products.

Many large, growing countries are also in a period of rapid economic development that has boosted average incomes. IMF data show that in China alone, per-capita income (adjusted for the purchasing power of the currency) rose from $3,844 in 2003 to $11,868 in 2013, for an average annual increase of 11.9%. At the beginning of the period, the average Chinese income was just 9.7% of the average U.S. income, but the figure rose to 22.4% by the end of the period. A similar story can be told for India and many other countries. The key takeaway is that as people in these countries become richer, they demand higher-quality, more protein-rich foods. Economists have noted the strong increase in demand for meat products, which in recent years has raised prices for corn and other animal feeds. The increase in wealth may also raise prices for other types of foods, such as fresh vegetables.

The important thing to remember is that this increase in demand is coming at a time when agricultural supply is being constrained in many countries. Many countries around the world are struggling to deal with a loss of arable land to development, insufficient water supply, and reduced availability of labor. Fortunately, those problems are generally much less severe in Mexico. In this environment, Terra Nova stands ready to provide financing and expertise to Mexican companies so that they can take advantage of this new environment.

Patrick Fearon, CFA
Vice President, Fund Management

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