Investment Strategy:  Third Quarter 2022Rising Food Prices, Rising Discontent

Rising Food Prices, Rising Discontent

Firstly, thank you to our friends at Goldman Sachs for the data.

Depending how far you are prepared to go down the Google search history for a definitive answer, the world’s most expensive burger will set you back in the region of £5,000. Whilst finding anyone with the sanity (or lack of) to buy such a rarity is presumably rarer than it is served, the steady pace of global domination of the mighty burger continues unabashed. The Economist has used the Big Mac Index as a way of exampling purchasing-power-parity (a measure of relative exchange rate value)  since 1986 and now Goldman Sachs have taken Burgernomics one step further in demonstrating the impact of inflation on our humble friend. Practical observation? Skip the bacon double-cheeseburgers for a while.

In a light-hearted way, Goldman’s focus our attention on a very serious issue which is the rising price of food. According to the UN’s FAO Food Price index, which tracks monthly changes in the price of a basket of food commodities, food prices were over 20% higher than they were 12 months prior to their latest figures which go up to May 2022. The war in Ukraine has piled pressure on global food markets not only due to the lost production as agricultural fields got turned into battlefields, but also given the significant supply disruptions faced getting existing grain out of stores in Ukraine through its traditional Black Sea routes. Furthermore, prices have also been impacted by a cost shock in fertiliser markets which translates into higher input costs for food producers and in turn, higher food costs. After all, Russia and Belarus are important sources of fertiliser for global food producers and sanctions have impacted this supply, for instance Brazil imports 85% of its fertiliser and, according to The Economist, nearly half of that comes from Russia and Belarus.

Whilst lack of fertiliser will reduce yields, the weather and low levels of rain threatens harvests in other areas from America to France, and droughts threaten harvests in North and Southern Africa. A potentially acute problem for North African countries who are also big importers of Ukrainian wheat. For example, Morocco imported over a million tonnes of wheat from Ukraine in 2020-21 and is also one of the top wheat growing countries in Africa, but has not even received half its ten-year average of accumulated rainfall during the rainy season, creating a stressed harvest coupled with an import shortage. Politicians fearful of civil unrest have responded by imposing restrictions on food exports, of note was the Indian government’s decision to impose an export ban on wheat. Also of note, is the amount of global wheat stores in China that are very unlikely to ever come out of the country and so exaggerate the amount of stocks available to be traded.

With food costs accounting for a far greater proportion of household spending in the emerging world than in developed countries, sadly the most exposed to rising food costs are the weakest able to contend with them. Discontent has already exploded in Sri Lanka, which serves as an example of how food inflation, economic mismanagement and weak government can deliver a crisis and drag many into poverty. Expect other countries whose weaknesses were being tolerated to find populations far less willing to tolerate them with an empty stomach.

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