If you are feeling a little poorer than you’d like, it’s probably because you’re making too many trips to the supermarket. A recent survey shows that over the last three years, the prices of tea, rice and bacon have risen 30%, 59% and 9% respectively. And that’s at a time when real wages in the UK are falling: CPI inflation is still over 3% but average earnings are rising at a mere 1.3%.
You can deal with this irritation in the way favoured by the rising tide of austerity gurus, and focus on cutting costs – using a website such as www.mysupermarket.co.uk to find the cheapest supermarket for your particular basket, for example. But it might be more satisfactory to simply invest in the production of food.
The arguments for this are straightforward. Population increases along with rising global wealth have pushed up the demand for meat, which itself pushes up the demand for grains (it takes over 8kg of grain feed to produce just 1kg of beef). At the same time, supply is both limited in the short term and subject to all sorts of disruptions.
Food isn’t like hard commodities – you can’t stockpile unlimited quantities in warehouses. You mine gold and then hang on to it. But grain stockpiles are a more limited affair. So, suffer a nasty disease, a drought, a flood or a protectionist shock, and you can see scary price swings.
Note that the huge rise in wheat prices this month was unanticipated by the market. After a bumper harvest last year, traders were expecting another fine one this year and so were busy shorting rather than buying wheat: in July, hedge funds were net short (i.e. they would make money only if prices fell). One Russian drought and one 80% rise in the wheat price later, and they are counting hefty losses.
Soft commodities were all the rage for investors in 2007 and 2008. At the peak, one popular agricultural fund found itself with $8bn-worth of assets. But as prices collapsed in the financial crisis, investors appear to have forgotten about the commodity supercycle idea they once bought into so passionately. The same fund’s assets have now fallen to a more modest $900m, and apart from the excitements of the past few weeks, says HSBC’s Charles Morris, speculative interest in the sector has been “rock bottom” all year.
But the supercycle hasn’t gone away. The dynamics that made it work as a story three years ago – the rising wealth of eastern consumers and so on – still exist. So it makes sense simply from a supply and demand perspective to invest in agriculture, and perhaps to do so now, when the price setbacks of the last few years have provided what Morris calls “an attractive entry point”.
So how do you invest? The obvious answer is simply to find a vehicle that tracks commodities. But this may not be the best solution.
Why? First, the weather. This month it has delivered profits to those who own wheat. But it could easily have gone the other way: another bumper harvest and the price would have fallen, not risen. And next year there may be no wheat rust, no droughts and no floods at all. It’s impossible to say.
The second reason is equally simple: in agriculture, nothing increases supply like demand. Blackrock estimates that global food production will have to rise by 70% by 2050 to meet demand. No estimates covering that amount of time are ever accurate, but with the population rising fast, this might not be that far out.
Some would say that as we can’t plant 70% more land, prices will soon go to the moon. They forget technology. As prices rise, everyone will bring surplus land into full use, but grain farmers will also use more fertiliser to increase their yields (which is why BHP Billiton is currently bidding for Potash Corp, the world’s largest fertiliser company) and livestock farmers will squeeze more animals into their fields and supplement grazing with bought-in high-calorie feeds.
All those UK fields currently being rotated between music festivals and car boot sales? When food prices start peaking you’ll turn up in your camper van to find last year’s spot packed out with genetically-modified fertiliser-fed soya beans. Then prices will fall back.
Given this, you are much better off, like BHP, trying to buy the makers of fertilisers and tractors rather than those who use them. That means buying an (expensive) managed fund such as Blackrock’s BFG World Agriculture Fund or just picking up the London-listed Global Agri Business Fund (LSE: AGRI), an ETF which is over 70% invested in equipment and chemical companies, and which comes with an annual management fee of a mere 0.65%.
• This article was first published in the Financial Times