Food Prices Are Rising

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss with you the globally rising food prices and how to hedge against it.

Keep a close eye on your grocery bill, because food prices are climbing,  shoppers may soon need more green in their wallets to afford their next breakfast, lunch, dinner, salad, coffee and every meal and social events.

Growth in food production has slowed over the past decade even as rising incomes in developing countries boosted consumption, said the U.N. Food and Agriculture Organization and the Organization for Economic Cooperation and Development (OECD). Due to this the agency expect prices to rise 10 to 40 percent over the coming decade, with the cost of meat rising faster and that of grains more slowly.

According to the Agency, higher prices will have their biggest impact in developing countries where some families spend up to 60 percent of their incomes on food.

Food consumption in developing countries has grown by up to 30 percent a year over the past decade as incomes rose, while consumption in developed countries changed little, the agencies said.

China’s imports of meat and oilseeds are forecast to grow as its increasingly prosperous consumers spend more on food, the agencies said.

The frequency of agricultural shocks caused by extreme weather events has also risen sharply over the past decade, and the resulting surge in food commodity prices has hit not only consumers, but everybody in the food supply chain, including farmers, agricultural traders and food manufacturers.

The prices of coffee, cocoa, wheat and other grains have risen sharply since the start of the year, because of droughts in Brazil and in the grain growing regions of the US, Ukraine and Australia.

As can be seen from below chart the S&P GSCI agricultural and livestock index has jumped almost 7.5 percent so far this year.

If the current drought conditions behind this year’s price increases continue, it will be the fourth time since 2007 there has been a jump in food commodities prices.

Meanwhile, meteorologists are forecasting a 50 per cent chance of a powerful El Niño developing in the second half of this year, which could intensify droughts and storms around the world.

The rising possibility of El Niño has farmers and traders on high alert, as it could mean that heat and dryness will affect India, and Australia, both large wheat producers. Cocoa and coffee prices could also be affected, because the weather phenomenon tends to bring dryness in west Africa and southeast Asia.

PGM CAPITAL COMMENTS:
By excluding food and energy prices from the core inflation, rising food prices will have a disastrous effect on the poor and the middle class all over the world.

As can be seen from below chart the food and beverage commodity price index has risen more than 10.7 percent in the last six months and is currently at an all time high.

Prices of beef, pork and fish all have risen double digit in the last 6 months as can be seen from below charts.

Due to this share prices of food producers are the best performing shares this year, for which the stock of world’s biggest food commodity producer has risen with approx. 18.5 percent during the last 6 months as can be seen from below chart.

We believe that stock of the above mentioned company will be an excellent hedge against rising food prices and due to this have a STRONG BUY rating on it.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of food commodities as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek