Inflation is becoming such an obvious problem that even some central bankers are starting to take note of it.
Here in Britain, Bank of England Deputy Governor Charles Bean says he fears that UK inflation – already between 4-5% a year – could turn out worse than the Bank’s forecasts.
In the eurozone, annual inflation has so far hit just 2.4%. But the “risks to the medium-term outlook… are on the upside”, says the latest European Central Bank report. That means an “increase of interest rates (next month) is possible”.
What’s spooking these central bankers? Oil, which we’ve discussed here a few times, is up by 50% in the last six months. But almost as big a concern are soaring food prices.
These are clearly bad news for consumers. But for investors, there are opportunities to make money as firms work to solve problems. Here’s how.
Food prices reach highest ever level
Rice is just about the only saving grace on the global food front right now. Its cost has increased by just 6.5% in US dollar terms over last 12 months.
Normally that sort of increase would still attract a few headlines. It’s almost four times America’s current inflation rate. But compared with other foodstuffs, the rise in the rice price is nothing.
Wheat prices have risen by 58% in the last 12 months on the Chicago Board of Trade commodities exchange. Soybeans are up about 50% while corn has leaped a staggering 87%. Orange juice has doubled since 2009. Sugar is at its highest level for 30 years.
It all adds up to global foodstuff prices rising to their highest-ever levels in February after an overall 40% climb over the last year, says the UN’s Food and Agriculture Organisation (FAO).
Why is this happening?
For starters, blame the climate. Extreme bad weather has damaged crops from Canada to Australia. In early February the worst freeze in 60 years wiped out entire crops all across the south western US and northern Mexico. Indeed it looks as though Mexico has lost over 15% of its annual corn harvest.
Russia, meanwhile, has banned grain exports after its driest spell in half a century. In China, one of the key agricultural provinces faces its worst drought in 200 years.
But it’s not just bad weather. Other risks are emerging which stem directly from the surge in oil prices. Fuel is an important input for farmers, so more expensive fuel will have a direct influence on production costs.
Also, as crude costs climb, more grain is likely to be diverted into making biofuels such as natural ethanol. This has already accounted for 40% of the current growing season’s US corn demand. Looking forward, there’ll be even less grain available for food supplies.
This is all bad enough. But then throw in a dose of commodity price speculation. Thanks to all those extra ‘QE’ dollars the Fed has pumped into the system, traders have been given much more financial ammo to fire at what’s moving up. Soaring food prices have become a very easy money-making target. So they’ve been driven even higher than the weather-induced shortages would suggest they’d go.
It’s all getting very painful for consumers. And the knock-on effects are fast becoming clear. There are plenty of reasons for populations in the Middle East and North Africa to be angry. But what ignited the revolutions was soaring food bills. Higher prices hit those on low incomes disproportionately hard. After a while, making a very visible protest seems the only way to hit back.
And it’s not over. Raw food prices are likely to keep climbing for several months, reckons the FAO. As the full force of all the higher commodity costs eventually works its way down the food chain later this year, end prices for consumers must rise even more, says Ephraim Leibtag at the US Department of Agriculture. So we’re likely to see plenty more food-related riots.
Rising food prices present new investment opportunities
For now, stock markets are still choosing to ignore the dangers of how an escalating global food shortage could play out. That complacency may soon be shattered. But one sector will certainly do well from surging food prices. And here’s the investment opportunity.
Yes, better worldwide weather next year would allow crop production some breathing space. But look at the long-term picture. The world’s population is likely to swell from today’s seven billion to around nine billion between 2010 and 2050, according to FAO forecasts. So global food output will need to climb by 70% over that time to meet demand.
That’s going to mean some serious planting and rearing for many years to come. Already, due to rising prices, US farmers are making record earnings which are set to improve further, David Silver at Bank of America Merrill Lynch tells Bloomberg. This will get them spending more heavily on seed, fertiliser and crop protection products.
So what are the stocks to buy? Silver likes the look of fertiliser maker CF Industrials (NYSE: CF). On a p/e of just ten, it’s hard to disagree. And in a recent MoneyWeek magazine cover story, my colleague James McKeigue had a look at a whole range of agri-related stocks and funds which would all be boosted by a farming boom.
It’s well worth a read if you haven’t already – subscribers can read it here: Harvest bumper profits from agriculture. This is a story with some way to run yet.
Category: Market updates