Profit from strong yields from agriculture: three stocks to buy now

published 3 July 2015

Each week, professional investors tell MoneyWeek where they'd put their money now. This week:Henry Boucher and Edward Bailey, Sarasin Food & Agricultural Opportunities Fund.

Countless demographic studies from various think tanks and research groups, including the International Monetary Fund and McKinsey, suggest that up to three billion more middle-class consumers will emerge in the next 20 years. The change in living standards, led by the huge populations in India and China, is happening at about ten times the speed at which the UK increased average incomes during the industrial revolution, and about 200 times the scale.

For many consumers, the first effect of this new way of life is a better diet: meat and fish are consumed more regularly, new fruits and vegetables are introduced into the daily diet, demand for processed and branded food rises and eating out becomes more popular.

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In short, the value of the global food and agricultural economy is experiencing massive, lasting change and creating revenue growth opportunities for firms right across the food value chain, from field to fork. In a world of subdued growth, these steady secular changes in the food chain provide many opportunities to find strong future profits potential. We aim to identify those niche areas within the food chain with significant scope for long-term growth and the stocks best placed to benefit.

One such trend is the tendency for more and more food to be eaten outside the home. As a proportion of household income spent on food, "food away from home" has risen from 24% to 44% in America over the last 40 years. It's a similar story in the UK and elsewhere. A glance down many UK high streets shows signs of the rapid growth in fast-casual restaurants(ie, Pizza Express, Itsu, Leon and Yo! Sushi).

Many such chains are owned privately or by private equity, so it's not possible to buy them on the stockmarket. But the trend is accessible in other ways. We have invested in the leading maker of "hot side" commercial kitchen equipment, Middleby (Nasdaq: MIDD).

This company is benefiting from the need to equip new restaurants sales are growing at double-digit rates.Another theme gradually affecting food supply is the move from "bricks to clicks". Ocado (LSE: OCDO) is leading the shift to a purely online business within the huge grocery retail industry. Its business model strips out the costs and expenses associated with running a portfolio of thousands of supermarkets, with all orders picked from just two huge, heavily automated fulfilment centres.

Despite the significant cost of delivery, Ocado has proved that it can match the mainstream grocers on price, while saving shoppers the chore of a weekly shop. As the business continues to grow, the costs of each delivery should fall. We expect Ocado eventually to earn margins and returns that exceed those of traditional grocers. Its technological lead also provides opportunities to sell the model to other food retailers.

In the past month a number of deals have been announced in the agribusiness sector notably the $45bn approach for the Swiss agricultural inputs company Syngenta by Monsanto and the $7bn bid for German potash producer K+S by Canada's Potash Corp. Syngenta (Zurich: SYNN) is the world's largest producer of a wide range of agricultural chemicals and seeds, with a high exposure to the growing agricultural sectors in emerging markets. Syngenta's approach of combining seeds, crop inputs and top-quality agronomic advice has resulted in strong sales growth the bid from Monsanto reflects the potential value yet to be realised.