The bull market in food

Food is cheap. We’ve heard (and written) a lot about the rising price of soft commodities recently. We’ve noted the 9.6% rise in UK vegetable prices in the year to May alone. We’ve pointed out the shortages of peas, potatoes and cauliflowers, the tortilla riots in Mexico and the suffering caused by high onion prices in India. And this week our attention has been caught by the fact that in Italy, the pasta makers’ union has just announced that spaghetti prices will rise by a fifth in September. But all these price rises come against a background of 30 years of falling food prices. 

Since 1975 the corn price has fallen 75% in real terms, for example, and as a note from Hugh Hendry at Eclectica Asset Management points out this week, milk and beef prices may have risen in the last year, but it’s still been a long, long time since we saw “happy faces on the dairy pastures of England”. The result has been a total lack of investment – no one expands capacity in a 30-year bear market – and also a lack of inventories (these aren’t needed when markets are oversupplied anyway). However, as is usually the case, the long bear market in food has created the perfect environment for a huge and long-term step-up in prices. Supply is tight and inventories are low, yet demand is growing fast. It’s growing partly because of rising and richer populations, but more dramatically as a result of the fast rise in the oil price. The cost of a barrel of oil has risen 42% since January and is clearly going to stay high. The result is that, as Eclectica put it, “food has become so cheap relative to oil that it seems like a good idea to make fuel from it”. And it is this that is turning out to be the catalyst for the new bull market: as land is diverted from growing wheat, peas and cauliflowers to producing the feed corn needed for ethanol production, so price inflation will spread across the sector.

The question is how one can make money out of this. One answer is, of course, to buy a farm. But in the UK land is already priced for its City-banker-status value, rather than its food production, while buying land abroad is  easier said than done (I’ll be looking at this in more detail in one of our August issues). Otherwise, you can invest in ETCs (exchange traded commodities) – there are now several that give you exposure to baskets of grains. But the best way, says Hugh Hendry, is to buy farming-related equities, especially those that produce the kind of modern equipment a bull-market farmer might fancy. Tractor enthusiasts, he says, might go for Case New Holland, a European firm owned by the Fiat family and listed in New York. The shares trade on only 0.9 times sales, whereas John Deere (the tractor brand even I have heard of) trades on 2.2 times. That makes it a cheap way to buy into one of the few sustainable bull markets around at the moment.