The best way to play rising food prices

I started writing about the ‘commodities supercycle’ back in 2002 or so. It was a pretty easy call at the time – prices had been in a bear market for 20 years, but the numbers coming out of China made it clear that it wasn’t going to last.

You didn’t need to know anything about mining or the mechanics of it to invest. All you needed to know was that the demand for most metals was greater than the new supply of them.

This was the age of the Chinese killer stat. Even by 2004, China was the largest consumer of zinc, tin, copper, wool and cotton. More than 20 Chinese cities were installing subway systems. The country was in the process of building 50,000 miles of three-lane highway (about the same length as the entire US interstate network). There were a mere six cars per thousand people in China, versus 400 per thousand in the US. By 2025, 70% of China’s population was to be urban – and they were to be living in 219 cities, each with more than a million inhabitants. And so on.

It isn’t so easy any more. You can still bandy about fantastic-sounding numbers, but with Chinese growth finally slowing, a good few predictions (such as the one that says that in 25 years Chinese demand for copper will be higher than all the copper mined in the world so far) are beginning to look more outlandish than likely.

I’ve been warning of a slowdown in China for some time, but there isn’t much room for argument any more. The official figures now have growth at 7.4% and some, such as Marc Faber of the Gloom, Boom and Doom Report, suspect it may be more like 4%.

More telling are some of the non-official numbers. Komatsu’s sales of excavators to China fell by 43% year-on-year in August (marking the 16th consecutive monthly decline). If sales of excavators are falling, you can assume that activity in areas in which excavators operate is also falling. Goodbye supercycle.

But there might be one part of the sector that should be part of a long-term portfolio – soft commodities. A note from Standard Chartered points out that when Neil Armstrong looked back from the moon in 1969, he looked to three billion people. Now he’d be looking at seven billion. And by 2020, that number is forecast to be eight billion (75 million new mouths a year). It might even rise from there before prosperity and urbanisation stabilise things. How’s that for “one giant leap for mankind”?

Not only are we getting more people, we are getting more middle class people. I’m more pessimistic than most about the idea that China can keep GDP growth at 7-8% plus forever (or even another year), but nonetheless, the fact that factory wages are rising at 15% a year suggests protein consumption is likely to keep rising.

Then there is Africa, which as the report points out has a population that is growing five times faster than that of China. It is also “the youngest in the world”, and boasts a fast-swelling middle class. So demand is likely to keep rising. Yet at the same time, desertification and urbanisation are cutting into current land supplies; biofuels are interrupting the supply chain; and season of nasty drought is reminding us that agriculture consumes 70% of the world’s water.

Finally, it is worth looking at agricultural prices and remembering that they have not participated in the supercycle to the same extent as hard commodity prices: adjusted for inflation, key prices have still not reached their 1981 levels. According to Diapason Commodities Management, corn stands at only 45% of its 1973 highs, while beans and wheat are at less than 30% of theirs. Wool prices remain at a fraction of the one-time highs, and an onion farmer in Tasmania, says Standard Chartered, still only gets half the price per kilo that he got in 1980. How does that make sense?

I wouldn’t invest directly in prices of commodities; they are just too volatile to make sense for most investors and price rises in food markets are often self correcting (wastage falls).

There is also scope to improve global yields. There has been no real green revolution in Africa, for example, and even in China things aren’t much better. Take pig farming. Right now, says Jonathan Fenby of Trusted Sources, 55% of the world’s pigs live in China. However, 90% live in small pens. Add a little agribusiness into the mix and – while the pigs might not fancy it much – you would find yields rising and prices falling fast.

So instead of looking to invest directly, you are probably better off with companies that are involved in improving productive capacity – for example, Agriterra (LSE:AGTA),  Bunge (NYSE:BG) or Syngenta (although as this has just hit a new high, now might not be the time). Or with one of the many funds the supercycle has produced. Most hold much the same stocks, but Sarasin Agrisar and First State’s Global Agribusiness fund have good records.

• This article was first publihsed in the Financial Times

  • DrD

    Or what about good old fashioned supermarkets? Surely as the price of food goes up so will their profits.

  • jimtaylor

    Investing in Lonrho (LSE:LONR) is a way of sharing in the future growth of Africa in terms of agriculture, fishing, sales of John Deere equipment, Fastjet flights etc.

  • Jack

    I am a farmer in the uk and slowly getting hacked off with it, we are making no money the middle men and supermarketss squeeze us the whole time making huge profits whilst in most circumstances barely pay us the farmers the cost of production for our food. We were getting £150 a tonne for wheat in 1992 and we’ve achieved £156 this harvest, we were getting 27p per litre of milk in 1994 and currently we recieved 26p last month compare that to oil, house prices, gold! Can you think of anyone manufacturing a product at todays prices and recieving prices form 20 years ago for it whilst we have had huge increases in fuel, fertilizer, wages and our own cost of living, they call it progress… thanks alot Tesco!!

  • Dyadco

    Jack’s comments reflect the truth of agricultural businesses worldwide.

    As consumers, we just want more for less. Its our human condition.

    But even if prices are frozen, the fact is that our producers are getting hit firstly by general inflation, which contrary to figures released by the government, I feel is much higher than we are being told, by ever rising costs of materials and then as an additional whammy, are being over legislated with ever increasing regulations which inhibit their actual skills of producing the food for our tables.

    Added to that, the razor thin margins they get when dealing with the major supermarket chains makes agriculture for so many farmers a loss marking proposition.

    I am not a farmer, but I really see that this situation has to change.

  • Dyadco

    We must start to look at ourselves not as individuals, but as members of a community, and as such have to understand that to enable food to be on our tables, we have to accept price increases that keep pace with inflation if for no other reason, to enable the farmers to keep producing.

    If these increases just go into the supermarkets bottom lines, well, we have failed the farmers and eventually, we will be the ones who suffer by paying more for imported foodstuffs when we could have produced better quality fresh food for less.

  • Anaesthetic

    Re Jack.

    My cousins farm beef cattle and take on extra work as agricultural contractors. The family used to be mainly dairy based, but like many, they left when production costs rose above the price paid per litre.

    Farmers in the UK will have to stand up to the supermarkets with one voice and agree within themselves that they will all abide by their representatives negotiated prices.
    The supermarkets know full well that they can `divide and rule` farmers at the moment because they can always find someone who is willing to `cut a deal` at bargain basement price, just to get a deal.
    In many ways farmers are their own worst enemies. Until you form commercial collectives/cooperatives and negotiate prices as large groups, the supermarkets will continue to split and play you.

    Understand that the supermarkets will NEVER `do the right thing`.
    They only ever do their own thing.

    Get organised and hammer the NFU into an organisation that keeps your farms flourishing.

  • Pro

    I do not understand these misplaced vibes about protectionism for farmers. Especially grain farmers – it is not like grain is a short-life produce and therefore if farmers do not like Tesco why don’t they sell to China? UK manufacturers have to compete with whole world. UK professionals have to compete with whole world as borders are fully open for the highly qualified. Why farmers shold be protected from competition? I am paid a lot less because I have now to compete with the whole world and I would not be happy to pay more for food to protect certain sectors from competition.

  • Dyadco

    Pro,

    its not so much protectionism than whether we want an agricultural sector at all.

    Farmers just aren’t making enough to survive.

    Spending a lot of my year in Asia, I can say that China doesn’t buy grains that are produced here, at least not in commercial quantities.

    They buy rice.

    The rice harvest in SE Asia this year has been very disappointing, so that will be a cost increase for them.

  • Pro

    Dyadco,

    The same can be applied to everything. I.e. manufacturing sector – shall we be driving Rovers instead of better brands produced elsewhere and pay for them as much as Germans for BMW X5? Or may be stick with locally produced music players in the tape format because impossible to fully produce everything for mp3 players in the UK? Or may be ban all foreign specialists so that Doctors/programmers/accountants/bankers could earn more then they currently do due to competition from recent arrivals? As for UK farming too many of them have flushy Land Rovers to conclude they are not surviving. In any case farming does offer a quality of life mot measurable in money like for example many creative jobs do and therefore attract a smaller monetary remuneration.

  • jack

    i don’t drive a flushy land rover i rent my farm i’m in negative equity if i sold up my stock wouldn’t cover my debts at the minute because of this supermarket price war dairy crisis when i can sell and cover my debts i am going to retrain and give up my farm and find another job.

    Pro please do not confuse wealthy Earls and Lords who have owned land for hundreds of years with farmers like me struggling to survive nearly 40% of uk land is tenanted.

    I’m not asking for protectionist pricing at all or the goverment to intervene with price i think it is very wrong to use tax payer money to support any industry especially ours, the uk dairy market specifcally is an artificial market i’m trapped on my farm at the minute and i know it sounds stupid but i can’t afford to get out and i’m tied to milking cows

  • jimtaylor

    I have some sympathy for UK farmers and always buy local produce as far as possible, but the other side of the equation is that personal incomes are falling.

    The latest figures from the ONS say “National income per head, taking inflation into account, fell more than 13% since the start of 2008″

    http://www.bbc.co.uk/news/business-20048421

  • mary

    The supermarkets are oligopolies and this makes the situation unfair for suppliers and producers. The EU has been devastating for UK
    farming. We should certainly do more for our farmers – I take the point that some markets are global now – but not for fresh produce.
    Some of the stock recommendations are good, but Agriterra is quite a big loss in a very short space of time.

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