Food. It is one of the fundamental human needs, yet in developed economies we often disregard the complexities when it comes to food security. But in today’s age, where rising living standards and an increasing population across the globe are driving demand for more food, the case for investing in food is robust. But what happens when food security is upended by supply constraints?
Amid the impact of the pandemic, soaring inflation and now the war, this is a question we have been asking ourselves lately. And in our view, the case for food and agriculture-related investments is no longer just compelling, it is a necessity.
The BetaShares Global Agriculture ETF (ASX: FOOD) tracks a diversified basket of the largest global agriculture companies outside Australia, hedged into Australian dollars. It holds companies that operate across the full value chain within the food industry, spanning fertilisers and agricultural chemicals, packaged foods and meats, agricultural products, agricultural and farm machinery, trading companies and distributors, plus a number of other areas.
The ‘FOOD’ ETF provides an opportunity to invest in the food and agriculture theme at a time when macroeconomic forces have come together to underscore the need for exposure to this industry. Here’s why we’ve taken a core position in the 'FOOD’ ETF within our flagship investment portfolios.
The war has exacerbated supply issues
The current war in Ukraine has spurred a rally in a number of commodities, including oil, gold, coal and of course, food. It is sometimes lost on us that while food is an essential need, it is also a commodity.
We see the war as an event that may lead to potential disruption to agricultural production. This could be either from sanctions or western nations shunning Russian and Belarussian exports, and the prospect of a downturn in exports from Ukraine.
Russia and Ukraine account for about 28% of global wheat exports, as well as 32% of barley exports and 74% of sunflower exports. There is little doubt in our mind that disruptions to Ukrainian and Russian grain shipments from the Black Sea would lead to higher prices.
However, the impact is far broader. For starters, Belarus and Russia export 40% of global potash, which in the long-term, already stands to benefit from the intersection of a number of global megatrends: a rising population, changing diets, and the need for the sustainable intensification of agriculture. In the meantime, Russia’s invasion of Ukraine could result in prolonged disruptions to the global supply of potash and nitrogen crop nutrients.
Recently, global spot prices for potash hit an all-time high of around US$814 per tonne. It is fair to surmise that the longer the war (and the fall out) goes on, the longer and potentially tighter the sanctions against Russia and Belarus. In turn, we anticipate potash prices continuing to rise as traders look for alternative supplies.
While China could import potash from Russia and Belarus, thereby mitigating the risk of steep price rises, it has faced growing pressure to effectively stop providing finances that Russia is using for the war. Furthermore, as China would need to finance the trade itself and organise shipping, insurance and the like, it would command a powerful position to pass these costs onto Russia.
Supply constraints are popping up all over the world
While the war has brought light to the issue of food security, supply constraints have been a consistent theme over recent years, and we expect this to continue into the future.
The loss of two major exporters in Ukraine and Russia has been compounded by news that the condition of the wheat crop in the world's top producer, China, may be the "worst in history" according to the country's agriculture minister.
While the obvious solution may be to increase supply, Ukraine’s planting season is a mere few weeks away and effectively a ‘write-off’. What’s more, the dangers associated with key shipping channels like the Black Sea leave a big question mark over the distribution of agricultural commodities.
Further afield, poor growing conditions in drought-affected parts of the U.S. Plains look set to further tighten supplies.
In Europe, Serbia recently announced it will ban exports of wheat, corn, flour and cooking oil to counter price increases, while Hungary has banned all grain exports. Bulgaria has also announced it will increase its grain reserves and might restrict exports until it has carried out planned purchases. It is a similar story in Romania, a major grain exporter where supply has tightened as international buyers seek alternatives to Russian or Ukrainian supplies.
Soaring natural gas prices are another headwind confronting the agriculture industry and global grain production as natural gas is used in the nitrogen-containing fertiliser manufacturing process. As such, global fertiliser producer Yara, which manufactures fertilisers vital to boost crop yields, temporarily slashed its output of ammonia and urea at its Italian and French plants in early March. Ammonia-nitrate fertiliser is one of two fertilisers used by commercial farmers. We do note that Yara has recently announced last week that they have restarted production at their Italian and French plants.
The disarray in global supply chains has also been an ongoing threat. From production, where labour shortages have proved burdensome, and the impact of catastrophic weather events have decimated crops, through to distribution and even shelving, every step in the supply chain has been hit.
It follows that these disruptions, as well as the likes of global warming, represent major supply risks that could put further upward pressure on already-high world food prices – which in turn could boost profits for producers.
The fundamental hedge against inflation
There is little secret that inflation has been marching higher around the world for the best part of the last year. One of the core inputs when measuring inflation is food prices. Rising food prices are inevitably passed on to end consumers, which means rising food prices are a strong if not reliable indicator of rising inflation.
In February, the Food and Agriculture Organization (FAO) reported that global food prices reached an all-time high. The Food Price Index, which tracks global prices for dairy and vegetable oil products, was up 24.1% versus a year ago.
Given the ‘FOOD’ ETF provides exposure to a basket of companies involved in agriculture and farming, the fund essentially represents an investment proxy for rising food prices. It has historically been highly correlated with broad commodities, as shown below. That also means it represents an investment proxy for inflation, effectively offsetting rising consumer prices.
Should central banks tolerate above-average inflation for longer than expected, we believe the ‘FOOD’ ETF will continue to offer exposure to a moderate level of capital growth and protection against the effects of inflation.
While the war has brought attention to food security by virtue of the supply risks for major crop suppliers Ukraine and Russia, this is a much broader issue affecting many other corners of the globe.
Whether it is growing demand for adequate food, concerns over crop conditions, slashed exports among other countries, supply chain difficulties, or higher gas prices stifling fertiliser manufacturing and crop yields, each of these issues have played a part in driving global food prices to record highs.
The ‘FOOD’ ETF provides exposure to the entire agricultural supply chain, and at a time of growing urgency, and a backdrop of soaring inflation, we believe it should be a core staple holding in a diversified portfolio.
Have a great week,
George Wong - Certified Financial Planner