The United Nations’ staple food price index recorded its biggest increase since 1961 in February 2022, after an already stunning 23.1% increase in 2021 – effectively putting the most vulnerable populations at risk.
By Clément Maclou, Senior Thematic Portfolio Manager
This indicator, which tracks meat, dairy, grain, oils and sugar prices, is bearing the brunt of the impact of the war in Ukraine and sanctions against Russia, in addition to pre-existing factors related to the Covid -19 crisis such as disruptions of the supply chain, logistical burdens and unmet demand. Food inflation is also expected to remain elevated as Russia and Ukraine together account for 30% of global wheat exports, 50% of sunflower oil and 18% of corn.
The short- and long-term effects of rising food prices
Food price shocks will have a negative impact globally, particularly in emerging economies where food accounts for a proportionately larger share of spending. In the United States, the cost of groceries makes up 7% of the CPI index, while this number rises to 15% in Europe and up to 40% in sub-Saharan Africa. The contents of the plate also have a significant impact on the price. For example, European countries have a long history and culture of bread consumption; As a result, wheat makes up a quarter of the diet there. In South Asia, on the other hand, wheat accounts for only 7% but rice, the dominant crop, accounts for 42%. Until now, however, the rise in price of rice has been much lower than that of other crops: this is certainly good news for local consumers. Finally, countries heavily dependent on Russian and Ukrainian exports are likely to suffer the most from supply chain disruptions. Eastern Europe, the Caucasus and Central Asia are already among the hardest hit countries. Let’s also remember that the Arab Spring of 2011 was triggered by a rise in food prices and, unfortunately, Egypt is also particularly dependent on Russian exports.
In the short term, we certainly know that we have to learn to live with (much) higher inflation and volatility. This should benefit all segments that depend on farmers’ USD income, such as irrigation, agricultural machinery, fertilizers and, to a lesser extent, soft commodities trading. On the other hand, segments that are net buyers of commodities are likely to see their margins shrink. Our analysis has therefore identified several business categories that could suffer in the near future such as: E.g. packaged food, food ingredients, beer production and biofuels.
In the longer term, we believe the rules of the global geopolitical game will evolve, with a growing bias towards the desire for food autonomy and protectionism. For example, Switzerland has just signed an agreement with Qatar for their supply of natural gas, and the United Kingdom has signed an agreement with the United States to guarantee the supply of various products, including beverages. China and the United States could be particularly in demand, with the former holding half of the corn reserves and the latter using 40% of their corn production to make ethanol. The United States appears to be particularly well positioned as it is now self-sufficient in terms of food, technology and energy. On the other hand, European countries seem to be comparatively more vulnerable.
Another effect that should materialize over the long term is the acceleration of adoption of new technologies that can increase yields while reducing environmental impact. As we mentioned in our letter for the first quarter of 2021, precision agriculture is very well positioned in this regard. For the record, it is based on the implementation of technologies ranging from yield monitoring and “big data” to remote sensing, and on fundamental agronomic principles such as optimally supplying the crops with fertilizers, water and pesticides only where they are needed. In this way, the use of arable land, food production and resource efficiency can be maximized while minimizing the impact on the environment. Food produced in the laboratory should also benefit directly from this new environment, since price parity with traditional agricultural products will be easier to achieve in an inflationary context.
Food from the Laboratory: From Fiction to Reality
To define food produced in the laboratory, let’s take meat as an example, bearing in mind that this technology is reproducible for all types of products of animal origin. Laboratory-grown meat (also called clean meat, cultured meat, cell meat, or meat in vitro) is a meat produced by cell culture in vitro conventional animal cells. On paper the concept is quite easy to understand, but the technology behind it is much more complicated to understand and for fairly obvious reasons we cannot go into detail in the scope of this writing.
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