Can you invest to hedge against food price inflation?

The rise in food prices over the past year could be a sign of things to come, with a growing world population, changing climate and geopolitical instability opening the door for price shocks for years to come.

The Russian invasion of Ukraine is emblematic of an increasingly fragile global order that could fundamentally alter the supply chain for food and the staples we are used to consuming.

This will have inevitable consequences for consumers, businesses and financial markets, and major investors are preparing to respond.

Food and non-alcoholic beverage price inflation in the UK slowed in May, but remained at a sky-high 18.4%, down from 19.1% in April, as Britons continue to suffer from skyrocketing costs of basic goods, according to the latest Office of National Statistics data show.

The dairy market has been perhaps the most exposed to cost pressures, with milk experiencing the largest price increase of 40 per cent in a year.

Ben Green, director of Atrato Group, said: “On the agricultural stage, the war in Ukraine has had a substantial impact on commodity prices.

“As a major exporter of food, particularly grain, Ukraine’s supply chains have been severely disrupted, driving up prices globally. Milk prices are very sensitive to the price of cattle feed, which is typically made from wheat and soybeans, increasing costs for dairy farmers.”

He added that rising energy prices have had an impact on “all stages of the food supply chain,” from maintenance to manufacturing to retail. Wage inflation has also inevitably increased the cost.

More than half of manufacturers are currently assessing rising energy costs in their final products, while 36 per cent are reviewing their energy procurement strategy, according to findings from PwC and Make UK.

UK supermarket bosses have recently noted a gradual decline in costs, but have also warned that food prices are likely to remain high as a result of rising labor costs.

But the country is not alone in facing shocks.

Before the war, Ukraine was responsible for about a tenth of the world market for wheat, 13% of barley, 15% of corn, and more than half of all sunflower oil.

Ukraine was estimated to be responsible for feeding around 400 million people around the world, and some of the world’s poorest countries, such as Yemen, Ethiopia and Afghanistan, were among the hardest hit by export restrictions.

Food can be a driver of inflation, and high food prices can influence government and central bank policy, as well as weaken economic growth.

Climatic and weather conditions also have a key influence on the prices of raw materials.

Tropical storm El Niño, for example, often drives up the prices of key consumer crops due to drier conditions.

Food prices have been a key driver of inflation in the UK

This year has pushed the cost of India’s rice exports, which accounts for more than 40 percent of global supply, to a five-year high.

The warming impact of El Niño is also likely to contribute to further climate change in the coming years, reshaping where it is possible to grow food and what we are capable of producing.

According to research compiled by asset manager PGIM in its ‘Food for Thought’ report, climate change will cause a 12% decline in crop yields and up to 35% decline in fish production.

An estimated 40 percent of the world’s farmland has already been exposed to water scarcity.

The scarcity of a commodity inevitably inflates its price, so the potential impacts of climate change are being analyzed to understand the market implications going forward.

Grain exports are highly concentrated, so sudden supply restrictions can have a dramatic price impact.

But Taimur Hyat, PGIM’s chief operating officer, said food insecurity has also become “a key driver of domestic political instability,” especially in emerging and frontier markets, and is therefore something investors should be aware of. consider.

He added: ‘More recently, food shortages and inflation led to the overthrow of the governments of Tunisia and Egypt during the Arab Spring of 2010. Equally important, the food sector employs 40 per cent of the global workforce and has a tremendous political influence.

‘Food security is also reshaping geopolitics. Given the recent impact of Covid-19 and the consequences of the Ukrainian War, food security is increasingly viewed as national security.

“Increasing bipartisan political pressure in the US to restrict China-linked farmland ownership is one example of the growing tension around access to food.

“Similarly, the focus on acquiring or leasing farmland as part of the Chinese government’s Belt and Road initiative has raised serious concerns in several countries in Latin America, Asia and Africa.”

But according to the report, the impact of climate change is only one of two drivers on the supply side of impending change in the food value chain along with technology and innovation.

Equally influential, according to PGIM, will be the drivers of demand; Change consumer preferences; rising wealth in emerging markets; ‘convergence of global diets’; and ‘population growth in sub-Saharan Africa and South Asia’.

Can you invest to hedge against food inflation?

Weighing these issues and developments allows investors to understand the potential portfolio risk they face, as well as find opportunities that support companies developing solutions.

Ravenscroft Discretionary Investment Manager Shannon Lancaster said: ‘Food systems are the biggest lever we have available to address our most pressing environmental and social challenges simultaneously.

“Given the immense environmental pressures caused by food production, there is tremendous opportunity for companies that are innovating and improving the sustainability of food production and food systems, from farm to fork.”

He singled out the Pictet Nutrition and Schroder Global Sustainable Food and Water funds, which are held within the Ravenscroft Global Solutions vehicle, as the best options.

Lancaster said: ‘Managers don’t just invest in food producers or retailers; In terms of the investment universe, there probably aren’t enough high-quality companies in the space.

‘You have the logistics part: companies working on how to get food from A to B in a more efficient way. There is also the impact on the environment: for example, how can we manage emissions from our food? How can we limit the impact on biodiversity?

“And then there’s ag tech: companies like John Deere that make precision ag tech.”

The drive toward sustainability has also led to increased consumer interest in meat alternatives or lab-grown meat, and several innovative companies have sprung up to meet that demand.

Agriculture and the environment impact each other, driving the need for more sustainable practices

One option for UK investors is AIM-listed Agronomics, a venture capital firm that invests in cellular agriculture and cultured meat.

Agronomics shares rose sharply in June after the company told investors that cultured meat had been approved for sale in the US, with UPSIDE Foods and Eat Just getting the go-ahead from regulators to sell. their cell-grown chicken to consumers.

Jim Mellon, co-founder and CEO of Agronomics, said it was a “monumental milestone in the development of the cultured meat industry,” providing a “framework for other jurisdictions around the world to approve the sale of cellular food products.” .

He added: “This decision has the potential to rapidly accelerate the development of the cultured meat market in the United States and beyond.”

However, the PGIM team is less confident about the future of these meat alternatives.

Hyat said: ‘Plant-based meats have dominated the headlines, but the reality doesn’t match the hype.

“The high growth rates of plant-based meat producers have either stalled or peaked.

“Just a few years ago, when fast food chains began offering Beyond Meat burgers, there were expectations of continued exponential growth and drastic changes in consumer preferences.

But growth rates have slowed, and today, the alternative meat market remains a tiny slice, less than 0.2 percent, of the $1.7 trillion global meat market.

In fact, the demand for alternative meat is in decline, while the global demand for meat of animal origin will grow by 14% by 2030”.