Market Views: Top gainers from rising food prices
Food prices have been a high-profile casualty of Rusia’s war of aggression in Ukraine, climate-related agricultural supply shocks, higher energy prices, and a ratcheting up of central bank interest rates around the world.
Those rates are expected to be dialled back as soon as next year, and the inflation that has accompanied them is already in retreat in major economies. But a broad consensus exists that the high food prices we are seeing today will remain elevated for the foreseeable future.
Another development driving food prices higher is climate change and the exaggerated El Niño weather patterns it is producing, which have led to droughts in some places, floods in others and wildfires in still others.
A report released recently by asset manager PGIM estimated that climate change would slash overall crop yields by 12% and fisheries by 35%. It said 40% of crop-producing land worldwide had already suffered from water scarcity.
Yet, there are also signs that the world is on the cusp of a food production revolution that may usher in changes as sweeping as those introduced by the so-called “Green Revolution” of the 1960s, in which technological advances drove agricultural production to new highs.
So where are food prices headed longer term, what will the future of food look like, and where should smart investors seek opportunities? We asked five experts.
The following contributions have been edited for clarity and brevity.
Wei Li, multi asset quant solutions portfolio manager
BNP Paribas Asset Management
Growth in the food industry is slowing down, as expected.
This deceleration is being driven by more moderate price increases, which aligns with rapidly easing inflation overall, given the trend of flattening production costs in the industry.
High inflation over the past couple years has fueled outsized growth for food companies due to price increases.
Although food firms have started to see meaningful gross margin gains, consumers are purchasing less per capita and switching from processed to fresh foods.
Looking forward, total food market growth could slow further due to lower price contributions, slower per capita consumption growth, and slightly lower global population growth.
Although we expect moderation globally, emerging markets could continue outpacing developed markets over the next decade.
Per capita consumption in Asia-Pacific has potential for modest growth as it remains relatively low compared to developed markets.
Given this, we expect developed markets like North America and Western Europe will likely make relatively lower contributions to market growth.
Looking at categories, meat and seafood substitutes could possibly lead growth over the next decade.
Additionally, changing climate patterns in the form of El Niño are expected to bring dryness to certain regions such as Southeast Asia, putting further upward price pressure on soft commodities such as palm oil, wheat and rice.
Shehriyar Antia, head of thematic research
PGIM
Food inflation may not have peaked everywhere quite yet, although there are indications that it has settled down in the second half of the year.
But it will take some time to come down to previous levels.
Disruptions to the food system – whether driven by extreme climate events, choppy supply chains or geopolitics – will continue to spur spikes in food prices and threaten food security going forward.
In emerging and frontier markets such as Nigeria, Egypt, the Philippines and Kazakhstan, where food can account for up to 40% of household spending, food inflation hits especially hard and can even lead to political instability.
Nevertheless, the food sector presents attractive investment opportunities. Active investors can identify leading companies that are truly enhancing productivity, resilience and sustainability along the food value chain.
For example, the rising middle class in Asia and Latin America are driving demand for high-quality, fresh food and with it the need for refrigerated and frozen storage and transport logistics.
This presents opportunities in cold storage real estate, such as warehouses, or the stocks and bonds of cold storage and transport providers.
For sustainability-minded investors, developing the cold transport chain can also help reduce food loss.
Importantly, innovation and technology can play a role in enhancing food security and addressing future challenges.
For example, crop science offers innovative investment opportunities such as drought-resistant seeds and organic herbicides that boost crop resilience and sustainability.
Agricultural technology is also driving smarter, more sustainable food production on small farms through the use of sensors, data analysis and mobile apps.
And on large, industrial farms, precision agriculture employs GPS, artificial intelligence and autonomous tractors to enhance yields while reducing water and pesticide use.
Phillip McNicholas, strategist, global macro, Asia
Robeco
This year stands as a potential inflection point for Asian inflation prospects, driven by the key cereal crop for regional diets: rice.
According to Robeco’s estimates, fertiliser-led cost increases risk causing a 4% decline in rice production in the 2023-24 harvest season, potentially pushing rice prices 40% higher in 2023 US dollar terms. And that’s before accounting for the adverse effects of El Niño.
Current foreign exchange forwards translate this to a 1.4 percentage point uplift in Asia-wide headline inflation.
Incorporating second-round effects and assuming flat energy prices, a one-off, one-year shock could raise regional inflation forecasts by 2.2 percentage points.
Currently, climate adaptation initiatives receive only 7% of climate-related investment. Yet they deserve far greater public and private investment.
A changing climate could increase the volatility of crop yields across Asia, potentially causing further price spikes in the long run.
Climate impacts alone are expected to lead to reductions in the global rice supply of up to 15% by 2050, and it has been forecast that by 2050, rice prices could be 32-37% higher.
We believe this presents significant opportunities in agricultural climate adaptation measures such as biotechnology that can help improve soil health, drip irrigation solutions and sustainable land management practices.
Marc Elliott, energy transition investment specialist
UBP
Inflation in the food sector is currently largely driven by weather, energy costs, geopolitics and demand.
Overall inventories of many crops are relatively low compared to historical levels as farmers haven’t made enough money for a number of years, so inventory needs to be rebuilt and we are probably a year into a two-year restock – one that needs good harvests to get there.
The higher prices observed over the last year or two are leading to a supply response, but there are a lot of moving parts.
For now, prices are well down from the highs of last year, but have rebased higher.
The pullback is in part because the risks in the space – such as Russia’s war on Ukraine – are better understood and there is some supply response.
However, El Niño weather is presenting further risks. Investing in agricultural names may arguably be a good way to hedge against climate change and certain geopolitical risks.
Longer term, a trend to watch is developments in biofuels that are being driven by government policy.
Although in cars this is perhaps mitigated by the move to electric vehicles longer term, nevertheless the key fuel for which to look for mandates is jet fuel.
If regulations evolve setting quotas for bio jet fuel – which airlines are also pushing for – as seems likely, they would add a major structural demand driver for crops such as corn, which is used as a feedstock in the US.
This would create sticky structural demand that would be hard to reverse.
Christy Tan, investment strategist
Franklin Templeton Institute
The global population is expected to increase, and so will food costs.
This expected population surge, combined with the negative impacts of climate change and the likelihood of disrupted harvests in the future, have made food inflation a sticky issue and are making food security a top priority.
There is an urgent need to accelerate innovation, increase food production sustainably, improve food processing models, eliminate waste, and enhance nutritional values.
Food innovation – in terms of production, storage and distribution – needs development. Countries that import foods may strive to diversify their sources at a country level, and also seek to improve their logistics.
A lot of tech development takes place with the involvement of private companies, potentially providing attractive investment opportunities.
Investors play a critical role in the development of food technology by funding the initiatives of private companies.
The United States, Canada and Brazil have adopted food technologies such as urban farming, vertical farming and other food production innovations with the aim of improving yields, efficiency and profitability. As modern technology progresses, we have seen newer methods of food production, such as gene editing, gain traction.
Ultimately, collective efforts involving government, multinational and private companies, farmers, financial institutions and investors working in tandem are critical to move countries closer to food security goals.
At the same time, investors are provided with opportunities and potential returns from active portfolio management and country allocations.