The price of food is likely to be a key investment theme during 2011 and beyond, as globally we see the impact of food price inflation.
New research from Fidelity International (Feeding the world: the economics of food) makes interesting reading and highlights a number of key issues.
Food prices, as measured by the UN’s composite Food Price Index, recently reached their highest level since records began over twenty years ago.
Recent food price increases can mostly be attributed to poor harvests as a result of adverse weather conditions. This is particularly true when it comes to corn, cocoa, wheat and coffee.
Thankfully rice has not seen such a dramatic price increase over the past twelve months. Rice forms part of the staple diet in many of the emerging economies where food price rises hurt the most.
It is worth noting that spikes in the price of food have caused panic in recent years. The economics of food is a serious issue for many countries.
In terms of the impact on price inflation in general, this differs depending on the country.
In the US, food has a mere 8% weighting in the overall basket used to calculate their Consumer Prices Index (CPI) measure of price inflation. It represents 47% of the total CPI basket in India, which just goes to show how much of an impact rising food price inflation can have on an economy.
In addition to the fragility of the agricultural system to short-term shocks, there are structural issues to consider which affect the supply and demand outlook for food prices.
The World Bank has estimated that global demand for food will rise by 50% by 2030. This is largely as a result of population growth, rising affluence and changing diets.
Looking specifically at grain production, the growing demand for meat in particular will have a big impact on grain production in the future.
There are several ways in which investors can access this important investment theme.
One example described in the Fidelity report is the potential for fertilizer manufacturers to profit from the need to produce more with less.
Rather than looking to take advantage of short-term price spikes, investors should be thinking about the opportunities that come from the structural issues attached to the price of food.
We expect food prices to remain an important investment theme for some time, with smart active fund managers coming up with their own approaches to take advantage of the opportunities.
Photo credit: Flickr/el clinto
