Food Inflation Story

In the UK, US and throughout the world food prices are on the rise and are set to significantly impact the inflation story. A recent article on the BBC website documents the problems that we are facing, the price of various food staples have increased dramatically over the last 12 months:

• Bread up 15%
• Milk up 11%
• Eggs up 18%

The reasons for these increases are many fold. The rising cost of oil is causing increased transport costs as well as farming costs. In Emerging markets, principly China, demand is growing exponentially and following basic laws of supply and demand is causing upward pressure on prices. Also the recent problems in Australia with their crops failing have meant that there are less cereals available.

The use of corn? in the production of ethonol is also on the increase, especially in countries such as Brazil. With Oil in limited supply we are sure to hear more on this in the coming years.

I recall a year or so ago reading an article by Jim Rogers, a world famous investor who made vast sums on money in the 80′s with George Soros, about commodities. A famous commodities bull, Mr Rogers pointed out that although metals had increased by huge amounts, agricultural ones hadn’t and as such were the best investment. In short, he expect food pice rises, huge ones.

Although I had considered investing in agriculture commodities I wasn’t sure of the best way to g about it. I thought an ETF that invests in commodity futures would be the best route, but having little knowledge in this area I decided against it.

Another idea is an American company called Bunge that grows soybean, a crop that is in great demand in China, and fertilizer. Again, I decided against this as at that time it had a health PE ratio and I thought I had probably missed the boat here.

With food inflation creeping into the system, I expect higher interest rates which will cause more pain for companies and the housing market. Although I think that the government have manipulated inflation figures by not including housing, they are going to have difficulty in hiding the food component!