Rocketing food prices may not necessarily lead to investment opportunities

The year has just begun and the world has spent much of that time struggling with floods and other natural disasters. However, Anet Ahern, head of research at Sanlam Investment Management (SIM) Global, has warned investors to resist the temptation to act on opportunities based on the growing food security threat.

“When the SIM Global team visited companies in some emerging markets and developed economies, we observed a common theme – rising food inflation,” Ahern explains. Some of the countries visited include Turkey, Greece, Ireland, India, China and the UK – with both China and India warning about food inflation. Ahern says India’s annual inflation rate rose 15.5 percent in the week to 8 January – with onion prices, for example, soaring nearly 100 percent year-on-year.

The trend is looking remarkably similar to that of 2008 – when food prices climbed to record highs globally. This led to food riots across the world at the time. More recently, the United Nations Food and Agricultural Organisation warned of a new ‘food price shock’. Its benchmark index of agricultural commodities prices rose to a nominal record in December 2010. “That has also led to a new set of riots in countries such as Algeria, Tunisia, India and Indonesia,” says Ahern.

Economists are pinning the recent food price spikes on extreme weather across the world – including flooding in Australia, Sri Lanka and parts of Latin America, droughts in Russia and sub-Saharan Africa, and last year’s floods in Pakistan and China. That’s pushing up agricultural commodities prices such as wheat, corn, sugar, meats and rice.

As a result, some pundits are predicting that a number of companies – especially food producers – are likely to become potential investment opportunities. But Ahern warns investors to be wary. “While themes, like food inflation, can change the world, it does not mean you will make money out of it. We look at themes, which will help us to screen for opportunities, and there is good reason to remain cautious.”

Ahern says that it’s not certain that food producers will be in a position to pass their own costs onto the consumer. “One simply doesn’t know if food companies will be allowed to pass costs onto consumers, or whether governments around the world will force them to stomach the increases themselves. For that reason, we are not dashing out to buy food companies or freight companies, as an example, but where we already have a position we are maintaining our holdings, and keeping close to management.”

Meanwhile, SIM Global has been reducing its exposure to countries where interest rates are likely to rise. The group has reduced its stake in Asia from 48 percent in June last year, to 45 percent. Exposure in Latin America has also been cut from 10 percent to just over six percent over the same period.