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Food Prices: The Real Wealth Asset Surge

Commodities / Agricultural Commodities May 26, 2011 - 02:41 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleAll developed countries, including top food exporter USA are reacting to rising food-price inflation as price growth forecasts are exceeded. Higher crop, meat, dairy, fish, vegetable oil, fruit and vegetable prices, and higher energy costs are now joined by rapid-changing weather conditions including drought in many key agro-producer regions, making the food price outlook more certain to deteriorate.

Even after a sudden drop in commodity prices, early May, seven of the eight foods tracked by the Standard & Poor’s GSCI Agriculture Index are much higher than one year earlier. Corn futures are up 98 percent, wheat gained 67 percent, raw sugar has advanced 44 percent, rice jumped 25 percent and the oilseeds supplying key vegetable oils like soy and rapeseed oil are up more than 40 percent.

Annual harvests later this year, for key crops in major producer regions such as wheat, maize, sugar beet and rapeseed in Europe, wheat in the USA, and rice, soy and rapeseed in China may be slashed by more than 25 percent, on current trends. Already low stocks for almost all key crops and foods will almost certainly further shrink, this year.

Retail-food prices in the USA were earlier forecast to increase a manageable 3 to 4 percent by the U.S. Department of Agriculture (USDA), but the outlook is now for higher increases as food companies pass along more of their higher costs through year-end. In Europe, government experts in major food producer France have warned consumers that certain key foods, including wheat-based products, vegetable oils, meat and dairy products may suffer double-digit price hikes before year-end.

Even at current levels of pass-through of rising costs through the agro-products value chain from farmers to consumers, at about 5 percent since January for European consumers and 3 percent for US consumers, this is the highest increase since the start of the 1990s, nearly 20 years ago. Where the food price indexes only focus imported tropical foods, like coffee, cocoa, bananas, palm oil and others, food price rises are already in double-digits. Bulk coffee prices, for example, have risen almost exactly 100 percent since late 2010.

Although food spending is a small item in average household budgets in high-income countries, rises have a disproportionate impact, underlining the most classic cause of economic recessions until the very recent past:   a major rise in food prices and food shortages. This cuts so-called discretionary spending through the economy, on all products and services, from buying and using manufactured products, to homebuying, leisure services and vacation tourism.

Today, in the developed OECD countries as well as many low-income and middle-income countries, consumers are under serious pressure from food prices rises, and linked rises in energy costs which account for as much as 20 percent of final food prices in some energy-intense sectors. These sectors include fish-farming, battery farming of chickens and turkeys, feedlot beef, urban regional horticulture, airfreighted foods and in-city fastfood, but the energy-intensity of the world's basic cereals - wheat, rice, maize and soy - has also steadily increased for decades, erasing productivity gains and price falls due to new seeds, better technology and increasing use of agrochemicals.

The link with recession is shown in the USA by the food stamps programme. This started in 1969 under recession conditions much weaker than today's, supplying food subsidies to less than 5 million persons. Today, nearly 41 million Americans or close to one-in-seven of the total population are enrolled in the food stamp program. This is now a vital action for preventing actual starvation in the USA - the world's largest food exporter. The most-recent surge of the food stamps programme started in December 2008, when monthly growth of stamp-issue to needy families soared to 245 000 and the total number of Americans receiving this food aid reached 31.7 million. Since then, the monthly growth of family enrolment in the programme has continued and only varied slightly, showing the date of entry into intensified recession of the US economy, by a powerful single indicator.

Covering as much as 33 percent of food needs for nearly 41 million persons in the USDA today, food stamps are the primary federal anti-hunger programme, and a major anti-poverty spending need for the US Federal government, running an announced and official $ 1600 billion budget deficit for the government's fiscal year ending in September 2011, but which most analysts believe will attain $ 2500 billion.  Helping poor people buy groceries is decried by some hard-right politicians in the USA, but using USDA data for April 2011, spending this year on food stamps will only cost the US government about $58 billion.

The apparent small size or value of this figure should however be compared with US food exports, whose fastest-growing and largest importer and consumer - China - spent a total of  $ 13.3 billion on these US exports in 2009, exactly doubling its purchases of US food in 3 years. No single world crop of basic foods, like the grains, has a total present value exceeding about $ 65 billion. Put another way, US food stamps needed to keep 41 million Americans from actual food shortage or starvation, costing about $ 58 billion in 2011, are close to the total value of US maize production - about $ 66.7 billion in 2010 - the US being the world's largest maize exporter country.

The United Nations Food and Agriculture Organization (FAO) said on May 23 that volatile and growing food prices are likely to remain and persist in coming years for several key reasons, and especially due to under-investment in agriculture, worldwide, growing mismatches between supply and demand, and low stocks. The major role of food prices in driving inflation through the economy, despite the small apparent role of food value in the economy, is also shown by the reaction of more than two dozen  central banks, including the central banks of China, India and in Europe, to raise interest rates this year for several identified reasons - including higher food prices.

This question is unfortunately akin to the question of how high gold prices can rise. Food price inflation starts with low initial food prices - shown by the apparently small value of food commodities and food output in high income countries - but can soar to extreme high levels. Higher wholesale and basic production costs over the past two to three years are still working their way through the supply chain. Major foodmakers and food supermarket chains including high-street grocers have less and less choice but to pass along rises to consumers. Under easily-defined conditions, like the present, even basic foodstuffs can double in price inside 12 months.

The knock-on in the supply chain can be rapid, especially due to agro-industrial change since the 1990s, featuring quick one-time cost savings such as "just-in-time" stock management. Surging prices for maize (or corn in the USA), used mostly as poultry and livestock feed in the US and Europe, and increasingly in Asia, have contributed to driving wholesale beef and pork prices, as livestock producers limit their herd numbers, and in some cases - as in Europe - reduce herd sizes because upstream livestock food costs are rising faster than downstream prices they receive for their meat. This is the "first cut" from rising feed prices for livestock, but the two-part food price inflation process is shown by an impact on meat prices from current prices in the agriculture sector that will not be fully felt until late 2011 and early 2012.

When food producers and retailers are no longer able to pass on rising costs a make-or-break situation results, with unpredictable but fast-rising ripple effects through the economy. Current corporate plans in the food sector are presently set in a range of price rise not exceeding more than about 5 percent for the remainder of 2011, in the U.S. and Europe, but this is now a fragile forecast. Double-digit gains in key inputs to restaurant and fastfood chains, including pork, poultry, butter, coffee and lettuce over the last three months to May 1st will surely result in rising prices in the restaurant sector, with a large and disproportionate knock-on to turnover in this sector.

Even with food price rises recorded to date and since 2010, prolonged economic slowdown in several countries, such as Japan and most European countries, will tend to be reinforced, curb overall economic  demand, and may speed the knock-on of coming food price rises not yet felt at the retail level, as the food industry battles declining demand. This outlook is reinforced by studies of impacts from the 2007-2008 price bulge for food, when food rose at the fastest pace in 28 years in nearly all major consumer countries, and consumers were quick to seek cheaper alternatives. This time, these alternatives such as eating poultry instead of beef and fish, are already operating at the final consumer level. The only major factor preventing higher food prices filtering through to final consumers is now the action of large industrial players trimming price rises because they don’t want to forfeit market share.

The food sector is, or was relegated as a low-rank investment sector, called a defensive strategy, with low and uninteresting yields or performance. Change of this concept rooted in the early 1990s has become radical, as a so-called "defensive asset" becomes leading edge. Shanghai-based Bright Food Corp. is a key example of this change, operating a worldwide search of large food sector buying opportunities. Backed by the Chinese government and always buying outright with cash, this strategy shows China's pursuit of hard assets which was previously focused on mining and resource companies, has now fully spilled into food production. India is most certainly pursuing the same strategy, as capital surplus countries utilise foreign currency reserves to buy food  rather than US Government debt and corporate securities.

The reality of food scarcity, coupled with high oil prices and a feeble US dollar, and increasingly unpredictable weather conditions will multiply the severity of rising food prices. This set of parameters can be imagined as a doomster paradigm but this reality is playing out in real time and in the real world. the matrix.  Being aware of this quadruple-threat to food costs creates an investment opportunity for those persons able to understand we are closer to the edge of recession, than out of recession.

We are now living through a period marked by rising oil and other energy prices, rising food prices, increased wealth in developing economies, massive national debt problems and fiscal deficits in nearly all major OECD countries, and many developing nations. All of these factors add to the growing and rational fear of inflation, and in that real world context owning real assets, whose investor returns are directly linked to rising prices and which have real value is a serious proposition.

Real assets have intrinsic value. Examples include gold, copper, oil fields, real estate, land, and certain others - especially food - which show special performance under inflation. Generally, inflation does not erode their value, and often raises them. Selecting the best prospects in and among agro-commodities is basic to designing Real Wealth Asset Funds, selecting assets, and managing them.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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