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Global Drought Heating Up Food Prices

2 May 2014 in Trading Ideas

Less than a month after we noted that the price of food in the US had posted its highest monthly increase since September 2011, a few more data points have sprouted up to suggest that increased food costs are solidly on the table for the forseeable future.

Last week, we learned that the price of arabica beans, which are used to make espressos and cappucinos, rose to a new 26-month high. The price has surged as Brazilian production figures showed a downward revision in production numbers for the 2014-15 crop on the back of the South American country’s drought.1

As a result, Volcafe, a leading Switzerland-based coffee trader expects an 11-million-bag deficit for the overall coffee market for 2014-15.

 

As the Financial Times recently pointed out, coffee prices have been a main driver behind what has been both a rise in prices as well as increased price volatility. Following a relatively benign 2013, coffee, wheat and sugar has fluctuated hugely, triggering a swift response from entities that spend hundreds of millions of dollars on raw materials.2

British consumer goods firm Unilever said that it expected commodity prices would increase by mid-single digits, forcing the company to seek cost savings and make price increases on selected products.

Earlier this month, Nestle noted a single-digit rise in input costs due to higher coffee prices, while Procter and Gamble recently told investors that “higher commodity costs” were a factor affecting its gross margins.

Meanwhile, worries about wheat production after a harsh US winter and the crisis in Ukraine, which is a top 10 producer, have driven up the grain’s volatility by 51%, while pork prices have been pushed higher by a virus in the US.

The FT noted that some analysts see this year’s rise in commodity price risk as part of a longer-term trend. On a cyclical level, the change in weather patterns and a rise in extreme weather events have affected prices for the past decade. Shifts in weather patterns, including floods and droughts, have increased over the past decade.

But volatility has also increased due to structural changes, such as the rise in the financial trading of commodities, as well as growth in the supply and demand trade of crops. One grains economist told the FT that there has been more fluctuation in agricultural commodity prices as they’ve become closely linked with commodities such as petroleum and ethanol.

Last but not least, consider the rise in demand, which has triggered an expansion in production to more expensive areas around the world, the FT said. This has led to a wider price range for agricultural commodities. Of course, even amid fluctuating ranges the increased risk of drought-impacted crops could put, at the very least, a floor under future commodity prices.

If you’re considering an alternative investment in the higher cost of food, consider our Rising Food Prices motif, a portfolio of companies that are responsible for making the food chain operate efficiently – from the seeds planted in the fields all the way to putting food on the supermarket shelves. It’s down 0.4% over the past month and has gained 10.3% in the last 12 months. The S&P 500 is up 0.5% in the past month and has increased 20.4% in the last 12 months.

1Emiko Terazono, “Coffee price climbs to 26-month high,” FT.com, April 25, 2014.

2Emiko Terazono, “Bigger food price swings hit consumer goods groups,” FT.com, April 24, 2014.

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