First State Executive: World Food Prices At Investment "Tipping Point"

World food prices have reached a "tipping point" where farmers are likely to boost their investments in increasing productivity, the manager of First State's Agribusiness Fund said Tuesday.

International prices for agricultural commodities have surged to record highs this year, according to the United Nations, after a succession of weather problems dented output for crops as diverse as grains, oilseeds and sugar.

Yet while this season's rally has been spurred by natural disasters, some investors argue it heralds a longer-term trend of rising food prices as the world struggles to increase output by 70% by 2050 in order to feed a predicted 9 billion people.

"We're at the point now where we're incentivising farmers to increase production," said Renzo Casarotto, senior manager of the $26 million fund. "We're going to see more [research and development in order] to become more effective in improving yields."

A major driver in the food-price rally this season has been a draw-down in world stock levels. Global sugar inventories are at a two-decade lows and grain production has fallen short of supply for the past seven seasons out of 11.

Yet while every major forecasting agency is expecting a rise in world food production next year, doubt remains as to whether this will sate demand given emaciated stocks, and prices are expected to remain high into next season.

Although he gave no specific forecast, Casarotto said if prices stay at these levels for a sustained period farmers will "take gradual steps to invest once they see these levels are sustainable" in the way energy and metals producers have done.

"The challenge is to produce more food with fewer resources," he said. "This will need investment." He cited U.N. figures estimating agriculture will need $80 billion a year to meet growing global demand.

Launched less than a year ago, First State's Agribusiness Fund invests in a range of agriculture-related businesses in order to cash in on the predicted rise in farm investments. Its largest holdings are in agricultural giants like Potash Corp. of Saskatchewan Inc. (POT.T, POT), Deere & Co. (DE) and Mosaic Co. (MOS), although it also invests in companies such as BRF-Brasil Foods SA (BRFS3.BR, BRFS) and Sino-Forest Corp. (TRE.T, SNOFF).

Casarotto said the fund intends to expand more in regions like South America and Asia where output growth will be centered. In these countries, he said, price transmission to farmers can be slower due to inhibitors like greater transportation costs, but the agricultural potential is vast.

"The transportation costs [for moving grains] from [Brazil's] Masso Grosso to Santo port is $3.50 a bushel so only now are farmers becoming incentivised to increase production," he said.

-By Caroline Henshaw, Dow Jones Newswires; 4420-7842-9478; caroline.henshaw@dowjones.com

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