Food for Thought!

I'm sure you will have noticed food prices increasing significantly over recent years. Food inflation, particularly in emerging market countries where food is a huge component of spending, can become a real problem. Recently it's been caused by extreme weather conditions leading to poor harvests; with supply falling and demand growing (think population growth), underlying soft commodities have risen. Climate change seems to becoming increasingly apparent in the world and so shocks to harvests of various soft commodities are likely to continue to materialise.

Although higher prices can hurt our wallets, there are ways as investors we can benefit from this. There are many ETFs that invest in the underlying soft commodities and should rise as soft commodity prices rises. There are also agricultural equities/funds that investors can buy. Higher soft commodity prices incentivise farmers to maximise their production in order to maximise profits. This leads to increased spend on high quality machinery, fertilisers and seeds and so companies involved in these should hopefully see increased revenues/profits. Even supermarkets can benefit as they have the ability to pass on cost increases to consumers and maintain/grow margins.

Even without climate change there are trends occurring which should support the 'agricultural' sector. Land is a finite source, and population continue to grow, so it will be necessary to increase yields in order to feed demand. This will mean investment in farm related equipment increases. Shifting dietary habits, particularly as the east adopts a more protein based diet also creates opportunities.

Baring, First State and Eclectica all offer 'agriculture' funds to which try to exploit some of the themes mentioned above.