Growing global population must still be fed

Mar 9 2009 by Gary Stockdale, The Journal

WITH the recession continuing to dominate the headlines there has been much talk about the risk of deflation. Indeed the risk of such has prompted aggressive policy action globally in the form of interest rate cuts, fiscal stimulus packages and latterly quantitative easing.

Whilst it is certainly true that the inflation figures in the UK are softening, recent research by the British Retail Consortium has identified an element of resistance that is extremely relevant in the context of our daily expenditure. The item is food.

The consortium found that food prices were up 9% year on year in February, the highest increase since September of last year. In comparison, non-food goods fell 1.7% in February year on year.

There are some currency issues at play here. Sterling has of course been weak against many of the world's major currencies, which has made British food more internationally competitive, at the same time as making imports, which make up a large proportion of non-food goods more expensive.

However, currency issues aside, it is impossible to get away from the fact that a growing global population must still be fed in both the good and the bad times. This is quite ironic from an investment standpoint.

This time last year many investors were jumping on to the soft commodities bandwagon captivated by the booming price of basic foodstuffs such as wheat. In classic bubble-like conditions prices were sustained by what appeared to be a reawakening of the theories of English political economist Thomas Malthus, who claimed that the power of population growth is greater than the power of the earth to provide sufficient subsistence to sustain it.

The seemingly insatiable demand for biofuels in the face of rising oil prices also played a part. Prices unravelled in spectacular fashion with many soft commodities slumping well in excess of 50% over the past 12 months.

However, drought conditions in Latin America and Northern China alongside reduced plantings of wheat in Russia and Ukraine has led some investors to believe that just as prices overshot in the speculative fervour, they may well have been exaggerated on the downside.

On this note ETF Securities, a provider of Exchange Traded Funds (funds that aim to track equity indices) and Exchange Traded Commodities (securities that offer investors exposure to commodities markets) have reported renewed interest in both instruments covering the agriculture and soft commodities space.

The point to note is food is more influenced by the vagaries of the weather than the economic cycle. The world’s population is still growing and whilst the credit crunch may well alter our patterns of consumption we still must be fed. Meanwhile in terms of investment it is possible that the future lies firmly between the excesses of the bubble and the despair of the crash.

Gary Stockdale is assistant director at Brewin Dolphin in Newcastle