How to invest as food security risks rise

  • Globalization and modern supply chains have created an abundance of cheap food in developed countries.
  • This situation is becoming less secure as the fallout from the pandemic and the war in Ukraine threatens the supply of essential food.
  • Investors can hedge against this development by making certain additions to their portfolios.

Food is something many of us take for granted, even though we shouldn’t. With a plethora of delivery services now available, you don’t even have to leave your home to buy something good to eat.

Globalization and the development of modern supply chains during the latter part of the 20th century created an abundance of cheap food in economically developed countries.

However, for the first time in decades, threats hang over this comfortable situation, as the ripple effects of the pandemic are compounded by the war in Ukraine.

This week, Indonesia, one of the world’s leading producers of edible oils, announced it was banning palm oil exports to ensure its own food security.

This follows forecasts that grain production in Ukraine could be 50% lower this year due to the conflict, while Russian exports will decline due to sanctions.

This has not escaped the notice of the world’s biggest investors, and some are warning that financial markets are about to feel the pain of this reality.

“Russia is the world’s largest wheat exporter and one of the largest fertilizer producers – has driven up agricultural commodity prices, in some cases to record highs,” the Chief Investment Office noted. ‘UBS.

“We expect production of key crops in Ukraine to fall by up to 40% this year, keeping commodity prices higher through 2023 and pushing importers to diversify their sources of supply. Additionally, with reduced access to fertilizer supply from Russia, we expect them to place more emphasis on solutions that maximize yield and reduce input use, i.e. say in seed technology and machinery. »

“There are also longer-term dynamics that have pushed food prices higher, such as the conversion of corn into ethanol, encouraged by subsidies, more volatile weather conditions and an increase in meat production, which in turn requires more grain for animal feed,” Anthony Rayner noted. , fund manager within Premier Miton’s Macro Thematic Multi Asset team.

“Energy costs are also relevant here, as they are an important input in the production and transportation of agricultural output. The effects of this recent inflation dynamics are being felt far and wide right now. example of recent events in Sri Lanka.”

Soaring food and fuel prices in Sri Lanka, along with a shortage of foreign exchange reserves, have plunged the country into its worst economic crisis in decades. The rupiah has crashed, losing nearly 70% of its value against the dollar this year, compounding the problem.

“The economy had already been weakened due to the negative impact of the Covid closures on the important tourism sector,” Rayner continued. “A shortage of imports has aggravated existing inflation, which appears to be over 20%, and the currency has weakened considerably, with the decline in foreign exchange reserves. As a result, the central bank has raised rates considerably.”

While the impact on day-to-day household finances is what matters most here, this developing situation also has serious implications for investors.

“We believe that fears of future disruption are likely to encourage investment in more localized production, including improving agricultural yield, reducing food waste and supply chain efficiency,” said UBS. “These elements are key components of our food revolution theme, which focuses on technology across the value chain that reduces the negative impacts of food production and improves food safety.”

One option for investors is to buy commodity trackers. “Broad commodities have historically performed well during inflationary regimes and are an effective geopolitical hedge given the risk of further supply disruptions resulting from the Russian-Ukrainian war,” UBS said. indices over the next six months. We continue to advise investors to stay long commodities with a preference for active commodity exposure.”

Exchange-traded commodities (ETCs) available from many retail investment brokers are an easy and cost-effective way to gain exposure to wheat, corn, and other foods like coffee beans.

In terms of companies that fit the bill, investors looking to tap into this theme should target large companies operating in food and agriculture technologies, according to UBS.

As a starting point, the major players in the field of food technology include a multinational conglomerate Bayer which acquired a seed technology specialist Monsanto in 2018, Corteva Agrisciencegenomics firm Evogene and fertilizer specialist Nutrien.

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