Why is now a good time to invest in food?

Prices have continued to soar in these markets, particularly the price of wheat. The bad news for consumers -- and the good news for those investing in soft commodities -- is that the boom is likely to continue for a long time to come.

Most markets around the world have been pummeled by the credit crunch, but the prices of agricultural commodities have been merrily taking off. There are very good fundamental reasons for this. As Sean Corrigan of commodities trader Diapason points out, “agricultural commodities were fairly oblivious to the credit rout as the age-old factors of flood, drought, frost, and disease interacted with the newer era influences of Asian meat and dairy consumption and Western biofuel promotion to keep, in particular, wheat and the European contracts extremely well bid.” That sums it up rather well.

The price of wheat has doubled since April, spurred by all the factors mentioned by Corrigan above  and a few others besides. India has swung from status as a net exporter to a heavy importer of wheat in just the last year or so. Russia has warned it is considering curbing grain exports, while Australia’s output is set to disappoint amid drought conditions.

The impact is already being felt on the UK high street. Premier Foods -- maker of Hovis loaves -- yesterday said that it was already passing rising costs onto supermarkets, leading one “major retailer” to hike the price of a loaf of white bread by 8p. CEO Robert Schofield said, “We’ve had a general trend in the last 10 to 20 years in which food has got irrevocably cheaper. But we’re now in a period of food inflation not seen since the early 1990s and it’s not going to go away quickly.”

Prices could rise even further. “We’d be surprised if general bread prices don‘t go up because the pressures upon us all are the same.”

Given that Premier is one of the UK’s biggest food manufacturers, this seems a reasonable prediction. It’ll be an interesting tug of war between the producers and the retailers in the months ahead. Retailers may not feel able to pass all of the higher costs onto consumers already feeling the pinch of rising interest rates, and it will represent a real opportunity to compete for custom. Normally, in those circumstances, it’d be the producers who felt the squeeze, as has happened in the recent past with rising energy input costs.

But when you get a structural shift like this in the production of a commodity, that tends to shift the power balance to the producers somewhat. Why? Because if there’s an excess of production, then producers are keen to offload their goods and that puts the power in the retailers’ hands. The supermarket knows that if supplier A won’t deliver at the price it wants, it can go down the road to supplier B. But if there’s a genuine shortage, and prices just keep rising, then the supermarket has to think more carefully about how it deals with supplier A, because if it walks away, it may find that supplier B has become more expensive in the meantime, or has already done a deal with another supermarket.

Obviously, this all depends on a variety of factors, and we wouldn’t be holding our breaths for a huge shift in pricing power away from supermarkets. But it’s something to keep an eye on. In any case, the softs boom looks like being around for some time. As Tom Stevenson says in The Telegraph this morning, “[Food] prices have tended to move in long cycles driven by extended periods of mismatched supply and demand… if the balance has shifted again, we could be in for a long and painful adjustment.” (moneyweek.com)