What's driving the latest surge in food prices?

published 10 January 2011

In this morning's Telegraph, Boris Johnson urges British industry to export its onion-growing expertise to India.

That may sound a bit odd. But only if you hadn't realised that the price of onions a staple in Indian cooking has shot up recently.

And onions are far from the only foodstuff rocketing in price right now. Earlier this month, the UN's Food and Agriculture Organisation (FAO) warned that prices are now higher than at the peak of the 2007 and 2008 crisis. Back then, we had rioting in several poorer countries as a result. "We are entering danger territory", said the FAO's chief economist, Abdolreza Abbassian.

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So what's causing the spike? And what should investors be doing about it?

What's to blame for rising food prices?

One of the main things driving food prices higher is the weather. I can't claim to be any sort of expert on meteorology. But reading around, it seems that one big culprit is a phenomenon known as 'La Nia'.

La Nia is when the surface temperature of the central and eastern Pacific Ocean is lower than normal. This is the opposite of 'El Nio', another weather phenomenon. The effect, as the BBC puts it, is that "in very general terms those parts of the world that normally experience dry weather will be drier and those with wet weather will be wetter."

The current La Nia is the strongest in 30 years, the Australian Bureau of Meteorology tells Jack Farchy in the Financial Times. That's why we've seen floods in northern Australia, for example, while Argentina is unusually dry. And if it continues there's no guarantee either way La Nia could cause drought in critical agricultural regions of the US. That would send prices even higher.

The good news about the latest crisis is that we haven't yet seen the same sort of riots as in 2008. That's mainly because, while the likes of meat and sugar prices have soared, many staples rice in particular haven't hit new records. But it's hardly a comfortable position for the global economy to be in.

The deeper point is that, beyond the bad weather, there are more structural reasons for prices to be rising. As populations grow and become more wealthy, they eat more resource-intensive food. That's understandable, and we should be trying to encourage it. But if we want to avoid having disruptive and damaging price spikes every time we get a freak weather event, then we'll have to improve food production methods around the world.

So what does all this mean for your portfolio?

As David Fuller points out on Fullermoney, '70s-style spikes in commodity prices could result in a serious "global inflation scare". That could see central banks hiking interest rates and "a potentially significant correction for stock markets". He believes we've got some way to go before it gets that bad. But we'll certainly be keeping a close eye on inflation this year.

In the meantime, you could try to protect your portfolio by betting on food prices. But as we've noted in the past, betting directly on food prices isn't investing, it's speculation. You can profit from it, but you need to feel confident that you understand the commodity markets you are trying to trade. On top of that, you'll need to have a solid grasp of market timing. For more on these topics, you could sign up for our free MoneyWeek Trader email.

Rising food prices aren't sustainable

But betting on commodity prices of any kind isn't the way to make money in the longer term. Eventually, prices will come down (in real terms at least). They have to. One way or another, rising prices aren't sustainable. People either find substitutes difficult though not impossible in the case of foodstuffs or they find ways to increase crop production.

And it's not as if there aren't solutions to these problems. For all the dire warnings of the Malthusian brigade, existing technology and farming processes could do a lot to raise production if the agriculture industry wasn't so hampered by lobbyists and political interference.

One of India's big issues, for example, is inefficiency. Its agricultural industry suffers from having too many subsidies and too little investment. The World Bank reckons that rice yields in India are a third of China's. Problems with storage and distribution also contribute to price spikes as crops are left to rot unnecessarily. Better logistics and infrastructure would solve a lot of these problems. That's even before you discuss the likes of new-fangled GM crops.

So the long-run solution and the best way to play rising food demand for investors is to back those companies that help countries to find ways to produce, store and distribute food more effectively. We've discussed many such companies in MoneyWeek magazine in the past, and we'll be looking at the sector again in an upcoming issue..

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.