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Ralf Oberbannscheidt, portfolio manager, DWS Invest Global Agribusiness

Strong performance from supply chain and infrastructure in Brazil offer opportunities for agribusiness investors

Recent volatility in food and commodity prices can be attributed to global growth in population and per capita incomes, increasing world consumption of animal products, rising energy prices and growing global bio-fuel production, depreciation of the US dollar and slower growth in agricultural productivity. Ralf Oberbannscheidt (pictured), portfolio manager, DWS Invest Global Agribusiness, believes that research and education provide the solutions to combat these long term issues, meet the food needs facing the twenty-first century, and provide returns for investors…

Current constraints to the country’s road and rail infrastructure places Brazilian producers at a disadvantage to their American counterparts in meeting the needs of a growing export nation. However, research has indicated that lower Brazilian labor costs, generally lower land values, and a favourable climate that allows for multiple crops per year will continue to push Brazilian production and exports to ever-greater levels.

As only a small portion of Brazil’s roads are paved and roads are the principal mode of grain transportation, Brazil is in need of significant private investment into infrastructure and road improvements if it is to remain internationally competitive in grains and oilseeds. The cost to improve roads to a sufficient state is 19 times more than the government’s current budget so they are still far away from the investment required.

Strong performance from the top ten holdings in the DWS Invest Global Agribusiness fund was focused on mid-stream agribusiness activity of supply chain managers, mid-size seed producers and fertiliser manufacturers. Fertiliser assets both side of the Atlantic also contributed. These assets are at the intersection of robust farmer economics, substantial cash flow and compelling valuation.

We fear that inflation is once again underestimated for 2012. Given the current strength in oil, crop prices and packaging, there is no evidence of a reduction in costs for certain segments of agribusiness. Also, taking into account globally stretched consumer wallets, there is also unlikely to be a quick recovery for food staples. Only innovation or innovative product categories could ignite margin recoveries.

Recent discussions with leading retailers provided us with further ideas of consumer shopping behaviour going forward - categories such as organic, private label and a combination of the two still promise double digit growth rates that could prove to be sustainable.

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