The average UK family now spends £750 a year more on food than 12 months ago; the world’s grocery bill has jumped by 21% this year; Russian bread prices have doubled; and three people have been killed in a cooking-oil stampede in China.
Food inflation is rising sharply as agricultural markets are straining to keep up with demand, and the “farm crunch”, as Ambrose Evans-Pritchard puts it in The Daily Telegraph, is far from over.
Over the past 20 years food output has risen by an annual 1.3%, while population growth has climbed by 1.35%. The global population is set to jump from 6.6 billion to 8.3 billion by 2030, while mounting wealth among consumers in developing countries is spurring a shift towards greater protein consumption. This implies higher demand for grains, as it takes about 7kg of animal feed, such as soya or corn, to produce 1kg of meat.
Note that China has now become a net importer of corn for the first time. The trend towards biofuels is also underpinning demand, while urbanisation and land degradation are crimping the supply of arable land.
Credit Suisse calculates that global food production will have to grow by an annual 3% to cover demand from population growth, changing diets and the burgeoning biofuels industry. But there is scant prospect of supply meeting demand. With China losing 0.6% of its agricultural land a year through urbanisation alone and acreage expansion potential elsewhere looking limited, arable land supplies seem unlikely to expand by more than 1% a year.
What’s more, the pace of productivity growth has declined to an average of 1.3% over the past 20 years, despite the introduction of genetically modified seeds. Stockpiles are meagre, with US corn inventories at a 35-year low and the EU’s grain mountains depleted. Given all this, agricultural prices are set to rise further.
Having lagged behind base metal and energy prices over the past few years, agricultural prices have risen strongly of late, with wheat futures up by almost 70% this year and soybeans hitting a 34-year high over $11 a bushel.
But the agricultural complex is still some way off its all-time peaks; cotton and corn, for instance, are about 50% below their records and sugar is about 85% off its 1970s high. “The supercycle clearly has a long way to run,” says Evans-Pritchard.
With Chinese demand surging, soybean prices look set to test the $12 level, according to Daisuke Yamaguchi of Yukata Shoji Co. And the outlook for sugar has greatly improved, says Manraaj Singh in Profit Hunter. Falling production in India and Europe, along with lower exports from Brazil as more sugar is devoted to ethanol production, suggests the world could go from a sugar surplus of 11 million tonnes last season to a deficit of a million this season. Add in increasing sugar consumption in the developing world as incomes rise, mounting speculative interest and the growing demand for sugar-based ethanol, and sugar is worth a punt.
There is a London-listed ETF (exchange traded fund) offering exposure to sugar (SUGA) as well as other softs, including soybeans (SOYB), while investors can also track a basket of grains (AGGP) and an agricultural commodities index (AGAP); see ETF Securities for more details. Consider also Hugh Hendry’s CF Eclectica Agriculture fund.