Two Investment Conclusions Regarding the Food Crisis
Last August, I was a guest on Russian TV, warning of another food crisis. Asked by the host which countries were most at risk, I gave him two: Egypt and Pakistan.
Getting Egypt right was easy. It was and remains the world’s largest buyer of wheat. Pakistan has a big import bill, too. Over the summer, massive floods destroyed many crops, quadrupling prices for staples like potatoes, onions, squash and tomatoes.
There are two investment conclusions I draw.
The first is that many emerging markets are on borrowed time. Egypt, for instance, grew 4-6% per year over the last several years, even through the financial crisis. It’s hard to imagine anything like that continuing when food prices are where they are.
All of the emerging markets deal with suddenly surging prices for many commodities. As they are still in the commodity-intensive phase of their growth curves, this means, at the very least, the arc of their economic growth rates ought to flatten out for a time. At worst, they are vulnerable to social unrest, as most also have large poor populations.
The second conclusion is about the unfolding food crisis in the context of the broader sweep of rising commodity prices. Everything from oil to corn seems to be making new highs.
The danger is that we have another 2008 situation. Prices got so high that demand dropped. Oil, for instance, hit an all-time high of $147 per barrel in July. Not too many industries can shrug that off. [Note this chart from UBS]:
This table might suggest where commodity prices may still have room and where they may not. All the agricultural commodities, along with copper, seem in danger of running against some kind of wall akin to 2008.
Oil and natural gas, on the other hand, still look reasonable compared to the run-up in 2008. Food and energy share a link in that we burn energy to make food. But food prices have made their highs this time without new highs in the price of oil (or fertilizers, for that matter).
So while food riots may continue, some commodity prices may well be nearing a short-term peak. Oil and gas, though, seem to have lots of room on the upside yet.
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