Features

How rising food prices will affect your wealth

The world faces a decade of rising food prices. Food is becoming harder and more costly to grow, while there are ever more mouths to feed. What does it mean for investors? John Stepek explains.

The world should brace itself for a decade of rising food prices.

That's what the OECD and the UN Food and Agriculture Organisation (FAO) warned last week.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Why? The usual reason. Demand will be growing more rapidly than supply. Global farm output is expected to grow by 1.7% a year through 2020, down from a rate of 2.6% over the past decade.

Meanwhile, the global population is expected to keep rising from about 7bn now to about 9bn by 2050.

Advertisement
Advertisement - Article continues below

Are they right? And what does it mean for your portfolio?

It's getting more expensive to grow crops

We've discussed the trend towards rising food prices regularly both here and in MoneyWeek magazine.

The good news is that in the short term, food prices are expected to slip from the highs of early 2011. When prices rise, farmers plant more, and as a result, prices should ease off. That's assuming we don't have problems with the weather, of course.

But in the long run, say the OECD and the FAO, "there are signs that production costs are rising" what with higher energy prices and pressure on water and land resources. Meanwhile, "productivity growth is slowing." In other words, it's getting more expensive to grow food, even though yields aren't rising as rapidly as they were in the past.

And on the other side of the equation, the population is growing steadily.

Now let me be clear, I don't think this will lead to disaster. I'm not a believer in the Malthusian argument, as I've said before: Global population is set to peak here's how to profit. Like any other forecasters, demographics analysts tend to do nothing more complicated than extrapolate the past into the future.

Advertisement
Advertisement - Article continues below

So if the population is growing, they foresee a world with too many people. And if the population is shrinking la Japan they calculate the date at which the race will fall into extinction.

But in reality, populations tend to correct themselves. As people get richer, they have fewer children, for all sorts of sensible reasons. And the most recent census results suggest that population growth may be approaching a peak.

However, just because I don't believe we'll get to a stage where it's "standing room only" on the planet, doesn't mean I'm a blind optimist. We're still looking at adding another few billion people by 2050. As those people become wealthier, they will consume more resources, which will put pressure on all sorts of areas.

Indeed, the Chinese are already feeling the double-edged sword of a more Westernised lifestyle. As The Times notes this morning, the amount of sugar consumed per head in China has risen by 48% since 2001. A full one in 10 adult Chinese suffer from either type 1 or type 2 diabetes, "alarmingly close to the 11% ratio that blights the notoriously obese US."

How investors can profit from rising demand for food

So what does this mean for investors? You can play soft commodities directly of course. You could spread bet them or buy an exchange-traded product that tracks their prices. It's not something we'd recommend though. Exchange-traded products that track soft commodities have a number of downsides, the main one being that they invest in futures contracts which have to be rolled over' regularly, resulting in a cost to the buyer.

As for the market itself, the ins and outs of the agricultural cycle, and the impact of rising prices on different crops and their relationships with one another can be hard to unravel. And you're effectively betting on the weather. Which in terms of long-term wealth-preserving strategies ranks right up there with playing the lottery.

Advertisement
Advertisement - Article continues below

The other point is that when push comes to shove, there are things we can do about high soft prices that don't necessarily involve planting more. We could ease the pressure on global food supplies by freeing up global trade, improving farming practises in various parts of the world, and by calling a halt to vote-buying subsidies for inefficient biofuels in the US, for example.

So we'd prefer to take a longer-term view by investing in companies that will help to make food production more efficient. My colleague James McKeigue recently looked at ways to play this (and other efficiency plays) in a recent MoneyWeek cover story: How to bet on human ingenuity in a world of peak everything.

Our recommended article for today

A painful reminder for investors emerging markets are risky

Emerging market stocks have gone from trading at a discount to their developed market peers to trading at a premium as investors chase growth. But as the case of Chinese timber group Sino Forest proves, the emerging market discount existed for a very good reason, says Merryn Somerset Webb.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/501578/the-charts-that-matter-the-powell-put-is-in-place
Economy

The charts that matter: the Powell put is in place

The Federal Reserve has done not so much a U-turn as a handbrake turn on monetary policy this week. John Stepek looks at how that’s affected the globa…
2 Feb 2019
Visit/520380/investors-neednt-fear-the-rise-of-europes-green-parties
EU Economy

Investors needn’t fear the rise of Europe’s green parties

Green parties across Europe are finding the centre-right to be natural allies. That will be great for business, says Matthew Lynn.
12 Jan 2020

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020