First State's Renzo Casarotto has warned difficulties caused last year by droughts and low yields in the US and India could rear their head again in 2013.
Casarotto, who runs the First State Global Agribusiness fund and previously featured in Citywire’s Managers to Watch, made the comments as part of an end-of-year review which included an outlook for the coming year.
Commenting on the ‘Jekyll and Hyde’ nature of 2012, Casarotto said initial positivity about the agriculture sector had turned into negativity as growing conditions worsened in key markets.
‘Early in the year, the market was optimistic about the volume of harvest. The assumptions were high, more acreage was being planted and inventory levels were to end the year higher than we started,’ he said.
‘Amazingly, in a matter of weeks, the growing season went from being ideal to problematic.'
'The US was experiencing high temperatures and drought conditions, as was the Black Sea and India and the market started to respond by indiscriminately selling processors, agricultural machinery and fertiliser companies.’
Casarotto said a lack of understanding about crop insurance in the US meant investors had underestimated the robustness of the farming sector.
Although he expects a better level of planting in the US in the coming year, Casarotto remains cautious.
‘The key question will be whether the lingering drought in the United States continues to impact and to what extent?'
'Will US farmers be able to insure their crops this year - as premiums could be higher as insurance companies attempt to better manage the risk return profile.’
Elsewhere in his outlook, Casarotto said he expects farmer optimism to remain high, partly driven by expectant levels of strong performance from the soy market in Latin America and the corn harvest in Brazil.
The First State Global Agribusiness I fund returned 19.75% in the 12 months to the end of November 2012. This compares to its Citywire benchmark, the FTSE AW/Basic Materials TR, which rose 2.66% over the same period.