Agflation

I am very interested in investing into agriculture-related companies or even the commodities themselves. Recently I read an article stating that the cost of grain has been rising this year and that this is leading to higher food prices. What are the reasons for this increase in the price of grains and do you think that this will continue?

Agflation is an innovative term conceived by economists to explain a new phenomenon being created by agricultural markets that is pushing up global food prices. From cereals and edible oils to coffee and cocoa, many agricultural commodities are at multi-year highs on a combination of robust global demand, particularly in Asia, as well as weather jitters. Grains that are close to ten-year peaks have seen rising demand from farmers as Asian meat consumption grows. Also, corn, sugar and soybeans, along with vegetable oils, are increasingly being used to make biofuels.

Supply of grains is being affected by the freak weather conditions that have played havoc with the past year's harvests around the globe. Australia, the world's sixth largest exporter of agricultural produce, has been suffering its worst drought for over a century. In America, farmers are bracing themselves for another hot and dry summer. The surge in crop prices has pushed up the price of food everywhere. Earlier this year, a leap in the price of maize used to make tortillas, sparked riots in Mexico.

Surging demand from China and emerging countries is also contributing to this trend. As the Chinese get richer, they are changing their eating habits by turning from a predominantly vegetable-based diet to one that includes more meat and dairy products. (Domestic animals consume nine kilos of grain to produce one kilo of meat). The Organisation for Economic Co-operation and Development predicts that beef consumption alone in developing countries will increase by nearly a third by 2015.

There is also increasing global demand for soft commodities such as sugar, corn, maize and soybeans in the use of alternative fuels. Governments, keen to cut carbon emissions and find alternatives to oil, are driving the market for ethanol and other biofuels. The US government is committed to cutting oil dependency by 20 per cent by 2017, mainly through a five-fold increase in renewable fuels. In Brazil, the government is investing millions of dollars in sugar cane to be turned into ethanol for domestic and export use. Brazil is already the world's largest exporter of ethanol and plans to double exports by 2010. The UK government wants five per cent of all fuel sales to be biofuels by 2010, which is a 20-fold increase from today's levels.

In inflation terms, the price of most basic foodstuffs is still 80 per cent lower than 30 years ago. If prices were to double in the next five years they would still be only equivalent to half their historic average. Analysts believe that this bull market in agricultural commodities could continue for at least another decade.

(Source: Reuters, London's The Sunday Times)

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Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com

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