Growing fear over surging food prices will affect not only consumers around the world, but also investors, who will face an array of sometimes-conflicting choices as grain shortages and demand increases cause havoc in financial markets.
Rising global food prices also are an investor concern.
Credit swaps, currencies and agriculture companies provide safety from a price surge.
A series of factors have converged to drive food prices higher: a Russian ban on grain exports along with weather problems in Eastern Europe; growing demand from emerging economies; and inflation-friendly central bank policies paramount among them, analysts say.
The United Nations has called an emergency meeting to address the issue, which already has led to riots in Mozambique and brought up memories of the 2007-08 global food crisis.
“It may not take much of a disruption in food supply to trigger another surge in prices given that the dynamics have become a whole lot more uncertain as a result of new and some increasingly powerful influences acting on both sides of the food supply-demand equation,” Nomura Global Economics wrote in an exhaustive study of the food price problem released earlier this week.
“They’re playing with fire. They’re building bombs,” said one analyst on the likelihood that Wall Street will develop ETFs that capitalize on rising food prices, thereby pushing them even higher.
“We believe that most models significantly underestimate future food demand as they fail to take into account the wide income inequality in developing economies.”
Nomura offered no specific forecast for how much prices will rise, but said Bangladesh, Morocco, Algeria, Nigeria and Lebanon are among the most exposed. New Zealand, Uruguay, Argentina, Denmark and the Netherlands, as net food exporters, are among the least. The US ranks 14th among least vulnerable economies to food inflation.
What It Means for Investors
For investors, the choices are difficult though growing, as advisors develop a slew of protection vehicles from the expected inflation.
Nomura recommends an array of strategies.
They include paying two-year credit swaps on 10 countries with the highest exposure to food prices and receiving the 10 with the lowest. A basket of currencies from countries that are net food exporters also is in the mix. And the firm suggests buying soft commodities and Asian exporters that stand to gain the most from food inflation.
“[T]here is a huge selection of investment alternatives available, such as grain transportation, fertilizers or seed manufacturers that can be acquired as part of an overall allocation to commodities,” the Nomura analysis said. “Moreover, since there are relatively few soft commodity futures markets, the sector does not lend itself to large-scale speculation such as that seen in oil and base metals.”