ith some of the recent doom-mongering headlines about rising food prices, you could be forgiven for assuming we are heading for an era of Zimbabwean-style inflation or Soviet-era shortages. Are we likely to start seeing hordes of people standing endlessly in queues around Netto, waiting to spend the week’s housekeeping on a loaf of stale bread? We think this is unlikely, to say the least.
Food prices have gone up significantly. The price of wheat has risen by more than 60 per cent over the last six weeks, reaching £160 a tonne. Prices of other soft commodities, including corn, coffee and cocoa, have also spiked and, with many agricultural crops being used in animal feed, meat prices are forecast to follow suit.
There are several reasons why prices have jumped. Supply is down, mainly because Russia, the world’s second-biggest exporter of wheat, is experiencing its worst drought in a century. Much of he country’s grain crop has been ruined, prompting authorities to ban grain exports for the rest of this year. Other parts of Eastern Europe have also been affected by the unusually hot weather, while in Canada heavy rains have damaged wheat crops.
As a result, the UN’s Food and Agriculture Organisation has cut this year’s forecast for global wheat production by 30 million tonnes.
Part of the blame can be laid at the door of speculators. Such activity was highlighted in July, when a hedge fund spent $600m snapping up 7 per cent of the world’s cocoa production. But much of the dealing on futures markets is also from farmers trying to lock in price gains while bakers and millers want to secure supplies before costs climb any further. All have acted to accentuate price rises.
Long-term demand remains strong. As the global population grows and diets in developing countries improve, demand for all grain products is going to continue on its upward trend. According to the FAO, global food prices have soared by 83 per cent over the last 10 years. What the recent market volatility demonstrates is that any potential disruption to supply can lead to rapid price spikes.
But in the near term, the market is likely to calm down again. Global wheat stocks remain substantial and the US and Australia are expected to add to supplies with above-average crops this year. As a result, wheat prices should revert back to normal before long.
British consumers need not be too concerned as the price of an average loaf should not go up by more than 5p to 10p in the coming months.
From an investor’s perspective, it is important not to lose track of the long-term story. Exposure to agriculture products has delivered substantial gains in recent years. Long-term demand will continue to rise while short-term supply shocks will result in similar price spikes.
The inherent volatility and risks involved mean this is an area where investors will not want to ever be too heavily exposed but it is impossible to ignore the fact that soft commodities and agriculture are becoming increasingly important parts of a properly diversified portfolio.
Lyndon Gill is investment director of multi-manager at Swip