Betting on food prices
Speculators salivate as the price of staples soars, while lobbyists bemoan the cost on the world's poor, writes Patrick Collinson
America's worst drought in half a century, poor harvests in Russia and Ukraine, and Britain's washout early summer will all push up the costs of basic staple foods such as bread and pasta, while rising animal feed prices will send the price of meat soaring, experts are warning.
Shoppers in the UK are already feeling the pinch, according to mySupermarket.co.uk, which compares prices at major retailers. It said minced beef is up 19 per cent over the past year, while peas, carrots and potatoes are up by 4 per cent to 8 per cent - though some of this is due to seasonal factors. Overall, global food prices rose by 6 per cent in July, says the UN.
America's searing summer, which has seen temperatures hit 43 degrees Celsius day after day, has left the oncerich cornfields of the Midwest brown and shrivelled. The worst-hit farmers are reporting corn harvests of just a tenth of the previous year. It is estimated that, in total, 45 per cent of the corn and 35 per cent of the soya bean crop has been destroyed.
The impact on family budgets, already hit by a steep rise in train fares and near-record petrol prices, could be severe, with economists nervous it will further delay any economic recovery.
But while the crops are withering, speculators are rubbing their hands. At Glencore, the world's biggest commodities trader, the head of its food-trading business said that the US drought will be ''good for Glencore'' because it will lead to opportunities to exploit soaring prices. The Swiss and Jersey-based dealer in wheat, corn, oil and copper, made a profit of US$2.3 billion in the first half of 2012.
It's not just big traders that have jumped on the food price bandwagon. Small investors are being encouraged to use exchange traded funds (ETFs) that track the price of individual commodities. Investments can be as low as £2 (HK$24.6).
Trawl the internet and you'll find articles such as ''How to invest for the global food crisis'' by Seeking Alpha, which claims it is home to ''savvy and inquisitive investors''. At InvestorDaily, the headline is ''Food stocks whet investors' appetites'', while over at Nasdaq it's ''Six agriculture ETFs on a roll''. So far this year the ETF for soya beans is up 44 per cent, wheat 34 per cent and corn 25 per cent.
But Friends of the Earth Europe is calling for a ban on institutional speculation in food commodity derivatives and commodity ETFs. ''The hunger of people must come before the hunger of financial institutions,'' it says.
Make Finance Work, a group of organisations committed to alternative solutions to the global economic crisis, is pressing the European parliament to control food price speculation when it votes next month on proposed reforms to financial regulation under the Markets in Financial Instruments Directive (Mifid). It's calling for consumers to sign a petition aimed at MEPs on its website, makefinancework.org. ''It could protect the world's most vulnerable from the whims of Europe's big financial players,'' campaigners say.
A German lobby group, Foodwatch, last month claimed success in its campaign against speculation after Commerzbank removed agricultural products from its ETF offering.
''Investment in this type of commodity fund pushes food prices upwards and so contributes to the hunger crisis in many parts of the world,'' Foodwatch says. Last year, Deutsche Bank also said it would ''refrain from launching new staples-based exchange traded products this year.''
But Fidelity Investments, the biggest fund manager, says investors should be looking at agribusiness stocks, such as fertiliser companies and farm machinery makers, as the solution to the world's food challenges. In a recent research note, Fidelity highlighted World Bank estimates that demand will rise by 50 per cent by 2030. Much of that will be driven by population growth and a big shift in Asian diets to more meat and dairy products. This has a significant knock-on effect on grain demand as it takes 7kg to produce 1kg of meat.
Fidelity believes there could be a ''second green revolution'' as increased fertiliser usage improves yields in Africa and Asia. It tips fertiliser companies such as Potash Corp, Uralkali and Mosaic as potentially star stocks.
James Govan, manager of the £132 million (HK$1.6 billion) Baring Global Agriculture Fund, says: "The things we are investing in are all about expanding food supply, such as fertilisers, drought-resistant seed, irrigation equipment and so on.''
Although volumes are down in the US, farm incomes are up because of rising prices, which has sparked an investment boom. It's one reason why Govan holds stocks such as agricultural equipment manufacturer John Deere, whose share price has more than doubled in the past three years.