Can you invest to protect against food price inflation?

Rising food prices over the past year may be a sign of things to come, with a growing global population, changing climate and geopolitical instability opening the door to price shocks in years to come.

The Russian invasion of Ukraine is symbolic of an increasingly fragile world order that could fundamentally change the food supply chain and the goods we are accustomed to consuming.

This will inevitably impact consumers, businesses and financial markets, and major investors are now preparing to respond.

Food and non-alcoholic drink price inflation in the UK slowed in May but remained sky-high to 18.4 per cent – down from the 19.1 per cent recorded in April – as Britons continue to suffer from rising costs of basic needs, the latest Office for National Statistics shows.

The dairy market is perhaps the most exposed to cost pressures, with milk seeing the largest price increase of 40 percent over a year.

Ben Green, director of Atrato Group, said: ‘In the agricultural phase, the war in Ukraine has had a substantial impact on commodity prices.

“As a major exporter of food, especially grains, Ukraine’s supply chains have been massively disrupted, driving prices up globally. Milk prices are very sensitive to the price of animal feed, which is usually made from wheat and soy, which increases the costs for dairy farmers.’

He added that rising energy prices have impacted “every stage of the food supply chain,” from maintenance to manufacturing and retail. Wage inflation has inevitably also contributed to costs.

More than half of manufacturers are currently factoring in rising energy costs into their end products, while 36 percent are reviewing their energy purchasing strategy, according to findings from PwC and Make UK.

British supermarket bosses recently noted a gradual reduction in costs, but also warned that food prices are likely to remain high due to rising labor costs.

But the country is not alone in facing shocks.

Prior to the war, Ukraine was responsible for about a tenth of the world’s wheat market, 13 percent of barley, 15 percent of corn and more than half of all sunflower oil.

It is estimated that Ukraine was responsible for feeding about 400 million people worldwide, and some of the world’s poorest countries, such as Yemen, Ethiopia and Afghanistan, were among those hardest hit by export restrictions.

Food can be a driver of inflation, and high food prices can influence government and central bank policies and dampen economic growth.

Climate and weather conditions are also important influences on commodity prices.

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

Food prices have been a major driver of UK inflation

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

The warming impact of El Nino is also likely to contribute to further climate change in years to come, reshaping where it is possible to produce food and what we can produce.

According to research by asset manager PGIM in its “Food for Thought” report, climate change will lead to a 12 percent drop in crop yields and up to 35 percent in fisheries production.

An estimated 40 percent of global cropland is already exposed to water scarcity.

The scarcity of a commodity inevitably raises its price, so the potential impacts of climate change are scrutinized to understand the implications for the market going forward.

Grain exports are highly concentrated, so sudden supply restrictions can have a dramatic impact on prices

But Taimur Hyat, chief operating officer at PGIM, said food insecurity has also become “a major driver of domestic political instability,” especially in emerging and frontier markets, and that investors should therefore be aware.

He added: “Recently, food shortages and inflation led to the overthrow of governments in Tunisia and Egypt during the 2010 Arab Spring. Equally important, the food sector employs 40 percent of the global workforce and has enormous political clout.

‘Food security also changes geopolitics. Given the recent impact of Covid-19 and the consequences of the war in Ukraine, food security is increasingly seen as national security.

Growing bipartisan political pressure in the US to curtail China-linked farmland ownership is an example of the growing tension over access to food.

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

But according to the report, the impact of climate change is just one of two supply-side drivers of imminent changes in the food value chain, alongside technology and innovation.

Just as influential, according to PGIM, will be demand drivers; Shifting consumer preferences; growing prosperity in emerging markets; ‘convergence of global diets’; and “increasing populations in sub-Saharan Africa and South Asia.”

Can you invest to protect against food inflation?

Weighing these issues and developments helps investors understand the potential portfolio risk they face, and can identify opportunities that support companies developing solutions.

Discretionary Investment Manager at Ravenscroft Shannon Lancaster said: “Food systems are the greatest leverage we have to simultaneously address our most pressing environmental and social challenges.

“Given the enormous environmental pressures caused by food production, there are huge opportunities for companies that innovate and improve the sustainability of food production and food systems, from farm to fork.”

She highlighted the Pictet Nutrition and Schroder Global Sustainable Food and Water funds, held within the Ravenscroft Global Solutions vehicle, as top picks.

Lancaster said: ‘The managers are not investing purely in food manufacturers or retailers – in terms of investment universe, there probably aren’t enough high quality companies in the space.

‘You have the logistics part, companies that are busy getting food from A to B more efficiently. There’s also the impact on the environment – ​​how can we control emissions from our food, for example? How can we limit the impact on biodiversity?

“And then there’s agritech – companies like John Deere produce technology for precision farming.”

The push for sustainability has also led to increased consumer interest in meat alternatives or lab-grown meats, and a number of innovative companies have sprung up to meet that demand.

Agriculture and the environment influence each other, increasing the need for more sustainable practices

One option from British investors is AIM-listed Agronomics, a venture capital firm investing in cell farming and cultured meat.

Shares of Agronomics rose sharply in June after the company told investors that cultured meat had been approved for sale in the US, while UPSIDE Foods and Eat Just received regulatory approval to sell their cell-grown chicken to consumers.

Jim Mellon, co-founder and executive director 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 nutritional products.” .

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

However, the PGIM team has less confidence in the future of these meat alternatives.

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

“The steep growth rates for plant-based meat producers have plateaued 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 faltered, and today the alternative meat market is just a tiny slice — less than 0.2 percent — of the $1.7 trillion global meat market.

In fact, the demand for alternative meat is decreasing, while the global demand for animal meat will grow by 14 percent by 2030.’