How rising food prices will affect your wealth

By MoneyWeek Editor John Stepek Jun 21, 2011

John Stepek

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Combine harvester in a wheat field © Getty

The world should brace itself for a decade of rising food prices.

That’s what the OECD and the UN Food and Agriculture Organisation (FAO) warned last week.

Why? The usual reason. Demand will be growing more rapidly than supply. Global farm output is expected to grow by 1.7% a year through 2020, down from a rate of 2.6% over the past decade.

Meanwhile, the global population is expected to keep rising from about 7bn now to about 9bn by 2050.

Are they right? And what does it mean for your portfolio?

It’s getting more expensive to grow crops

We’ve discussed the trend towards rising food prices regularly both here and in MoneyWeek magazine.

The good news is that in the short term, food prices are expected to slip from the highs of early 2011. When prices rise, farmers plant more, and as a result, prices should ease off. That’s assuming we don’t have problems with the weather, of course.

But in the long run, say the OECD and the FAO, “there are signs that production costs are rising” – what with higher energy prices and pressure on water and land resources. Meanwhile, “productivity growth is slowing.” In other words, it’s getting more expensive to grow food, even though yields aren’t rising as rapidly as they were in the past.

And on the other side of the equation, the population is growing steadily.

Now let me be clear, I don’t think this will lead to disaster. I’m not a believer in the Malthusian argument, as I’ve said before: Global population is set to peak – here's how to profit. Like any other forecasters, demographics analysts tend to do nothing more complicated than extrapolate the past into the future.

So if the population is growing, they foresee a world with too many people. And if the population is shrinking – à la Japan – they calculate the date at which the race will fall into extinction.

But in reality, populations tend to correct themselves. As people get richer, they have fewer children, for all sorts of sensible reasons. And the most recent census results suggest that population growth may be approaching a peak.

However, just because I don’t believe we’ll get to a stage where it’s “standing room only” on the planet, doesn’t mean I’m a blind optimist. We’re still looking at adding another few billion people by 2050. As those people become wealthier, they will consume more resources, which will put pressure on all sorts of areas.

Indeed, the Chinese are already feeling the double-edged sword of a more Westernised lifestyle. As The Times notes this morning, the amount of sugar consumed per head in China has risen by 48% since 2001. A full one in 10 adult Chinese suffer from either type 1 or type 2 diabetes, “alarmingly close to the 11% ratio that blights the notoriously obese US.”

How investors can profit from rising demand for food

So what does this mean for investors? You can play soft commodities directly of course. You could spread bet them or buy an exchange-traded product that tracks their prices. It’s not something we’d recommend though. Exchange-traded products that track soft commodities have a number of downsides, the main one being that they invest in futures contracts which have to be ‘rolled over’ regularly, resulting in a cost to the buyer.

As for the market itself, the ins and outs of the agricultural cycle, and the impact of rising prices on different crops and their relationships with one another can be hard to unravel. And you’re effectively betting on the weather. Which in terms of long-term wealth-preserving strategies ranks right up there with playing the lottery.

The other point is that when push comes to shove, there are things we can do about high soft prices that don’t necessarily involve planting more. We could ease the pressure on global food supplies by freeing up global trade, improving farming practises in various parts of the world, and by calling a halt to vote-buying subsidies for inefficient biofuels in the US, for example.

So we’d prefer to take a longer-term view by investing in companies that will help to make food production more efficient. My colleague James McKeigue recently looked at ways to play this (and other efficiency plays) in a recent MoneyWeek cover story: How to bet on human ingenuity in a world of peak everything. If you’re not already a subscriber, you can get your first three issues free here.

Our recommended article for today

A painful reminder for investors – emerging markets are risky

Emerging market stocks have gone from trading at a discount to their developed market peers to trading at a premium as investors chase growth. But as the case of Chinese timber group Sino Forest proves, the emerging market discount existed for a very good reason, says Merryn Somerset Webb. 

Comments (10)

Published in Investing in soft commodities | More articles by John Stepek

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  • 1. peaty

    (21 June 2011, 11:49AM)  Complain about this comment

    I can understand the arguments regarding growing population and an increasingly limited amount of farming land (just look at the number of natural disaster such as floods in Australia, Pakistan etc, affecting farm land in the last few years), but surely farming techniques will improve to compensate this. Companies such as Plant Impact are working tirelessly to introduce solutions to gaining better crop yields from the plants we plant, and thus should help in the global food supply keep up with demand.

  • 2. Roger

    (21 June 2011, 11:59AM)  Complain about this comment

    In 1994, in the South East UK,

    One 2-bed flat = 100,000 bread loaf

    In 2011, in the South East UK,

    One 2-bed flat = 200,000 bread loaf

    Rising food prices?

  • 3. peaty

    (21 June 2011, 12:31PM)  Complain about this comment

    yes, but house prices were inflating in the period 1994-2011, whereas food prices were pretty much flat until recently, so not a clear cut comparision. But my point is, the issues now and in the future, which is the increase in population and natural disasters, will put greater demands on food supply, but will be compensated as farming methods and products improve in order to increase production on the limited land available.

  • 4. David

    (21 June 2011, 01:25PM)  Complain about this comment

    @peaty
    This is a complex problem and has as much to do with resource depletion as it does with more efficient farming. Water and fossil fuels hold the key.

    Then there are drawbacks to intensive farming, where the land is degraded year after year. It's just not sustainable in the long run. As mentioned before on this forum the planet is way past it's carrying capacity for the number of people living on it.

    I'm expecting hyper-inflation at some point as all these issues come to bear.

  • 5. peaty

    (21 June 2011, 02:17PM)  Complain about this comment

    David, i agree its a complex issue and there is no silver bullet, but as food is a staple to life, and people will always need food, technical solutions will become more and more necessary to improve farming methods. I too see inflation becoming a huge problem, but lets not forget hyper inflation does not last forever, and while food prices are set to continually rise short term, long term they will stabilise as the new techniques kick in.

  • 6. Steve

    (21 June 2011, 03:57PM)  Complain about this comment

    The trouble is that it may not be scientifically possible to devise the solutions that we would wish for. It comes down to the fact that the world as a whole only has a limited supply of resources.

  • 7. peaty

    (21 June 2011, 04:15PM)  Complain about this comment

    the fact is these technologies already exist, and are slowly being rolled out, Plant Impact for instance uses eco friendly crop nutrients that actually increase the normal crop yielded by 5 times, while limiting the amount of water needed. Technology is, and will be the solution, as the world can’t afford to starve.

  • 8. alex

    (22 June 2011, 08:32AM)  Complain about this comment

    Roger with a flair for statistics like that I think you should work for Money Week.

    Peaty....there are absolutely vast underused areas of prime agricultural land in the world especially in Northern Brazil, all of which will come into production once commodities prices rise to a level where they become viable.

    And before anyone says it, yes youo do need energy to produce artificial fertilizers but than can just as well be Gas as in can Oil, and whilst oil may be in declining supply at present the world is awash with Gas.

  • 9. JGH

    (25 June 2011, 10:37AM)  Complain about this comment

    I don't quite understand the reason given at the start of this article for rising food prices. To paraphrase, "farm output will rise by 1.7% a year while the population grows from 7bn to 9bn over the next 40 years". That means population growth averaging 0.6% a year, well below the increase in farm output ... hardly a justification for rising prices.

  • 10. pete Alecks

    (16 August 2011, 11:27AM)  Complain about this comment

    One of the best ways to cut waste and save money is to buy food from one of those sites which sell food approaching or past its best before date (ie totally safe and perfectly good to eat). I use bestbuy-foods dot com

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