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Food for thought

Food inflation is something that affects everyone but there are investors who aim to make money out of this event. Bad weather and continued uncertainty in the economic recovery appear to be a boon for the continuation of the commodities’ story.

Alliance Trust Research highlighted that after almost doubling in July, food price inflation ticked up again at the end of the summer, particularly high in fish, fruit and vegetables. Bread and cereal prices also saw a rise in price growth due to concerns over the global supply of wheat.

Outside the direct impact of food inflation, for investors it is not all bad news. India has had a rough time of late as it has grappled with the effects of rising food inflation on its economy. However, while some commentators have questioned how the country will handle the higher cost for essentials, economists consider the situation will ease once monsoon season is over, which technically was last month.

So far, the impact of food inflation has not dampened returns from the region significantly. Although there are several India-specific funds at the bottom of the Investment Management Association’s specialist sector over the three months to October 1, they all still made gains.

Considering the price increases across many different commodities of late, it is no surprise that at the top of the specialist sector over one, three and six months are a raft of commodity-related portfolios – particularly gold.

Smith & Williamson global gold and resources fund manager Robert Lyon says that amid renewed fears of economic sustainability, gold has seen a resurgence in popularity and he does not think it will abate any time soon as we enter what he calls “the seasonally stronger period for gold.”

The volume of merger and acquisition activity in the gold sector is expected to increase, according to Lyon, as gold discoveries have declined and companies look to take advantage of strong balance-sheet positions and high commodity prices.

Gold is an asset that Investec head of commodities and resources Bradley George is also favouring at the moment. He believes we are in the midst of a long-term secular bull market in commodities due to ongoing industrialisation and urbanisation in emerging markets and upgrading and replacement of infrastructure in developed markets as well as constrained supply. In addition to precious metals, George is keen on grains such as corn and fertiliser equities, especially in light of recent M&A activity in that area of the agriculture market. He is not the only one to cite fertiliser as an attractive investment opportunity at the moment. The recent bid by BHP Biliton for Canada’s fertiliser firm Potash Corp has sparked increased interest in this sector.

First State Investments’ global agribusiness fund, which launched in May and is up by 16 per cent over the three months to October 1, looks to invest in the production, processing, distribution and marketing of soft commodities, as well as areas such as fertiliser and seeds.

Fund manager Skye Macpherson says: “It is no coincidence we are currently seeing significant mergers and acquisitions activity across the agricultural sector globally. A key factor driving that activity is the expectation for agriculture-related companies to see sustainable volume growth as they tackle significant increases in global food demand in the years to come. The higher demand is coming from a combination of population growth and rising incomes.”

Baring global agriculture manager Jonathan Blake is also keen on fertiliser, recently increasing his weighting to the sector as a result of the improvement in farmer profitability, positive momentum in fertiliser prices and M&A activity.

Blake believes the stronger grain prices are likely to continue to be a positive for farmers, which, in turn, should increase demand for agricultural goods and services, particularly in fertilisers, agricultural machinery and grain handling.

He says: “We believe long-term grain prices will be strong, with a declining ratio of harvested land per capita and the structural demand drivers of growing global population, increasingly sophisticated diets in emerging markets and biofuel usage.”

Providing the foundation for the bullishness of commodity managers is this theme of a growing global population, which the UN estimates as rising from 6.5 billion in 2005 to nine billion by 2050.

Macpherson says: “It is not only that more food is consumed but a rise in incomes across emerging markets is leading to a change in the type of food people consume.

“This change results in an exponential rise in demand for grain because more expensive, protein-rich foods, such as pork and beef, require considerably bigger quantities of grain for their production.

“In fact, our research indicates the world will need to more than double its food production by 2050 in order to meet this ongoing rise in demand.”

It is not all about demand. Supply in soft commodities has been under increased pressure of late, something managers do not see as changing any time soon. “Increasingly unreliable weather patterns and pressure on arable land from urbanisation constrain supply. For example, some of the world’s biggest consumers of agricultural products, such as China, could become increasingly reliant on imports,” says Macpherson.

But the supply constraints in soft commodities is a double-edged sword for investors, which could leave them confused as to which they would prefer. As the commodity managers note, issues such as inclement weather provide plenty of investment opportunities but also have a negative direct impact on just about everyone.

According to Alliance Trust, rising food prices hit the over-75s in particular as this age group spends the highest proportion of their budget on food. “The over-75s spend more than 17 per cent of their budget on food, compared with less than 10 per cent in the case of the under 30s,” according to the company.

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