Log In

Reset Password
BERMUDA | RSS PODCAST

A tale of rice riots, corn conflicts and wheat wars

In 2008 food prices soared resulting in significant unrest throughout the world. People seem to be able to put up with corruption, nepotism and cruel laws but when they can't eat things get ugly.Currently we have riots in Algeria over the cost of sugar and wheat.The Mexican government is playing in the corn futures market to hedge rising tortilla prices. India's food price inflation rocketed to a one-year high of more than 18 percent and they are now importing onions from their enemy, Pakistan.Food prices are also soaring at an 11 percent rate in China.In Kuwait they are offering free food rations for 13 months to quell concerns over rising food costs.In Tunisia a man lit himself on fire after he was forced to stop selling fruit - a riot ensued that toppled a multi-decade-long dictatorship.The Food and Agricultural Organisation of the United Nations has recently stated that the price of traded food staples such as wheat, corn and rice has increased about 26 percent from June to November and is now approaching the historic highs set in 2008.Clearly the price of food has become a major concern in the more developing markets where in some places consumers spend almost 60 percent of their disposable income on food.Several recent events have caused great concern in a shorter term cyclical aspect of the price rise: Queensland flooding in Australia and fires in Russia.I would argue, however, that this is not an anomaly but is reflective of secular forces that will continue to push prices on upward trajectory over time.There are numerous factors influencing this.One is the growing overall level of demand.Some forecasts call for the world's caloric intake to ratchet up from 17 trillion calories per day to nearly 25 trillion calories per day over the next two decades.What may be important is what people are eating.The expanding middle class in the developing markets is dramatically altering the landscape for the agricultural market.As living standards improve, one of the first things to change is diet.With the money to buy more than just a plate of rice and cabbage, the populations in developing countries are putting more eggs, dairy, poultry and meat on the table.So not only is the demand for protein going up, but so is the demand for grain, because more protein consumption requires more grains to feed the animals.In fact, it takes five to seven pounds of grain to produce just one pound of beef or pork.The World Bank estimates that global grain production will have to climb by 50 percent and meat production by 85 percent to meet the projected global demand in the next 20 years. Ethanol's competition in the food supply chain isn't helping matters either.The International Monetary Fund (IMF) estimates that 70 percent of the increase in corn prices during 2008 was due to demand for corn used in ethanol.In fact, current US ethanol policy calls for annual production of 36 billion gallons by 2022 which will only pressure prices as nearly 40 percent of US corn crop is currently diverted to ethanol.The supply side looks challenging as well.It is proving difficult to increase the amount of land suitable for farming.Most countries are dealing with declines in soil fertility, dropping water tables, and competition from urban development.That means that the best solution to any coming food crisis is for farmers to increase the yield they get from their existing land.From an investing perspective the opportunity is clear.All of this translates into substantial long-term opportunities for the companies that grow, harvest, distribute; and service the global food supply. Investors will have to be selective when buying stocks in this sector after a significant run in many agriculture shares over the past year.

My top ten surprises for 2011