Food and Borders

It is a crazy juxtaposition when the meat in USA is increasingly shifting towards ground beef (mince – burgers) as the hungry shift to lower cost protein;  whilst the meat shipped to the advancing countries in Asia is for steaks as the new middle class upgrade their protein meals.  

Updating the FAO Food Price Index for March, it is always surprising at how results are reported as “benign”.  It is quite correct to say that the March 2012 figure (216) came in barely above the February figure (215).  But as this graph shows, the index has grown by more than 14% per annum in the last three years.  That is not benign.

And of course the index over times shows that global food in both nominal and real terms remains near all time highs.  

Food prices remain critical for the world’s societal security and stability, which has been taking a beating lately (oh you know, the Arab Spring, Occupy, Mediterranean Austerity policies, and my household budget – if I had one).  And I have been banging on about it in my Peak food blogs, and inflation expectations.  

And all these issues have a real – meaning material – input into investment decisions these days.  Far more than they did in the past.  Not just as an indicator to investing in rural assets, or processors, or inputs (such as potash), but also where to put your assets so they will return a reasonable risk adjusted rate, but also protect capital.  My view is that a risk (including liquidity risk) and inflation adjusted return of zero percent with capital preservation over the next 5 years would be a winner in financial assets.  But the return on cattle is up near the 70% per annum.  With capital preservation.  Only subject to disease, which can be insured at a reasonable cost.  

In what countries will your investments be secure if food insecurity starts to rampage?

The CRB Index is down since the beginning of 2011, from a peak of nearly 700 (recorded peak) to 583 at present.  However, the pace of inflation in commodities since the mid 2000’s when it moved from about 250 (a cyclical high / range ceiling) to ~700 in 7 years.  

Commodities represent a significant input to the cost of food in developed economies, and to a lesser extent urbanised countries such as China, which recently passed 50% of the population living in urban centres.  By way of comparison, in the USA, the comparison is 82%.  Why?  Because food needs to be transported, requiring fuel inputs.  Crude oil is off its highs, but still at much higher levels than traditionally, when GDP is so soft everywhere.  

The Economist reported on the urban trends around the world here in January past.  So there are a number of issues pointing to food inflation rising faster than official inflation (which I do not believe for a moment) everywhere.  Increasing global population; shift to more dense protein diets by the new middle classes in the BRIC countries (less the middle classes in the so called advanced economies as their middle classes shrink – but at a slower pace); and rising urbanisation requiring greater input of fuel and energy for delivery and ag mechanisation to meet this growing need.  

In the USA food inflation in 2011 was officially 3.7% per the USDA and forecast to be 2.5-3.5% this year.  Right!   But this Bloomberg report suggests that corn and soy reserves are the lowest in years and could push food inflation to be at the higher end.  As I keep banging on – we have stagflation in the essentials:  food and energy.  

And then of course there is the other side of the story.  The USA’s food banks that feed the nations 49 million hungry people (16% of pop) are reporting they may be unable to feed these people due to higher food costs.  They argue that food inflation was 6% in the last 6 months of 2011 (putting the lie to the official rate), and that the healthy foods (fruits, veges, meat and dairy) provided to them fell 30%.  No wonder burgers are booming. 

And Sarkozy is complaining about the border controls of the EU member countries.  And of course picks on poor old Greece.  But zerohedge is reporting that this flow of immigrants are returning home, because frankly things are better there than in Europe.  Gate and horse bolted comes to mind, Sarkozy.  If you continue to impoverish the Mediterranean  countries with your austerity measures, border control done and dusted!

But the important point is that as the hungry grow, borders will become a problem.  Would Sarkozy be as tetchy if it were Americans arriving in hoards looking for work and a better life?  

Food inflation is going to change how we manage borders, how we manage safety within borders, and how we invest our savings as people and where we invest our capital as companies.