How rising food prices will affect your wealth

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.

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.

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.

So if the population is growing, they foresee a world with too many people. And if the population is shrinking – à 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.

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.

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