What the forgotten food crisis means for your investment

farming

Do you remember what the most attention-grabbing headline was a year ago?  Before the US decided to embrace the “change” administration, before the credit bubble burst, before the cracks in the financial system started to appear for all to see, the Olympic was still in the future, and Michael Phelps and Bernard Madoff were yet to become household names .  Yes, that time.  Do you remember what dominated the headlines then?

The global food crisis.

That, along with a general global resource shortage, seemed to be what was on most people’s mind.  It was hard not to notice.  All around the world, the grocery bill, along with the gasoline prices, seem to follow an unwavering upward trajectory.

The media loved the story.  Theories of “the perfect storm” emerged to explain the rise: population growth, change in diets, irregular weather affecting harvest, higher transportation costs, and the drive towards bio-fuels.

Then the global financial crisis hit, and we suddenly had bigger problems to worry about, i.e., our pension plans and investment portfolio cut by half.  Commodity prices started to fall, including agricultural food prices, the grocery bill’s upward march is temporarily stalled.

Then just like that, the food crisis front went quiet.

Has the global food crisis gone away? Has the hand of the market somehow corrected the excessive rise of grain prices, and we no longer have a supply problem?

No, of course not. The fundamental factors that drove prices up last year has changed little.  The demand from the increasingly hungry consumers from the emerging markets still remains, albeit the growth of demand may have slowed slightly as a result of the financial sector snafu.

Yet with tight money all over, we are faced with an increasingly dire supply situation.  Reduced international aids and banking lending could cause farmers to cut back on their plantings, which may lead to reduced harvests in some major exporting countries.  Lower food prices on the international market can make farming a losing proposition in certain parts of the world, further reducing the crop output.  And the sheer volatility of food prices, as demonstrated in the last two years, are making it increasingly difficult for farmers to plan and invest.

The last short-lived food crisis was driven by a strong surge in demand that caught the suppliers off-guard.  The brewing crisis that will inevitably hit us in the near future, I believe, will be driven mostly by a lack of supply.  When met with a steady growth of demand, we will find ourselves in a position where the lack of credit and thus ongoing investment, neglect of farming infrastructure, and the volatile oscillation of agricultural prices, have all but stagnated, if not outright damaged the farming industry.

The financial crisis has certainty got us all wrapped around its finger.  But the gathering storm in the under-investment of some of the most crucial industries, food being the most critical and dire, will become front page news once again in the near future.  Given rice, soybeans, wheat and other foodstuff prices have all fallen between 40-60% from their 2008 high, some settling in at the pre-rally prices, it may be worthwhile to take another look at this group as a way of beefing up your portfolio.

picture source: ~nuaHs

Comments on this entry are closed.

  • http://onemint.com Manshu

    I think commodities in general will do well and agricultural commodities in particular should do exceptionally well. Can you share some thoughts on the different ways in which one can invest in agriculture?

    Very nice picture btw.

  • http://onemint.com Manshu

    I think commodities in general will do well and agricultural commodities in particular should do exceptionally well. Can you share some thoughts on the different ways in which one can invest in agriculture?

    Very nice picture btw.

  • Dana

    Hi Manshu,

    Thanks for the compliment, glad you like it :)

    As to investing in agriculture, there are various ways of doing it. Depending on where you are located geographically and what your risk tolerance is, you can buy stocks directly, invest in a mutual fund, or invest in country indexes. I’m not here to dispense specific investment advice of course, but you can always look at large agricultural stocks such as Monsanto, Potash, and Mosaic and see if you like how they look. Alternatively, most large fund companies have classes of agricultural funds that may spread your risk a bit further. Or, if you like the agricultural story but don’t want to take either route described above, then you can go a different route by perhaps investing in agriculture-heavy country indexes. Countries such as Canada, Australia have quite a bit of agriculture stocks weighing their indexes. But then of course you run the risk of other parts of the index not performing. I know in Canada the index is also heavily weighted towards oil and other industrial commodities.

  • Dana

    Hi Manshu,

    Thanks for the compliment, glad you like it :)

    As to investing in agriculture, there are various ways of doing it. Depending on where you are located geographically and what your risk tolerance is, you can buy stocks directly, invest in a mutual fund, or invest in country indexes. I’m not here to dispense specific investment advice of course, but you can always look at large agricultural stocks such as Monsanto, Potash, and Mosaic and see if you like how they look. Alternatively, most large fund companies have classes of agricultural funds that may spread your risk a bit further. Or, if you like the agricultural story but don’t want to take either route described above, then you can go a different route by perhaps investing in agriculture-heavy country indexes. Countries such as Canada, Australia have quite a bit of agriculture stocks weighing their indexes. But then of course you run the risk of other parts of the index not performing. I know in Canada the index is also heavily weighted towards oil and other industrial commodities.

  • Pingback: Interesting Reads - 7th March | OneMint()

  • Pingback: OneMint - Economy and Your Finances - March 8, 2009 | OneMint()