There can be few investment themes as compelling as agriculture. Over the next couple of generations, a rising global population will demand more food at a time of reduced availability of arable land.
Additionally, globalisation trends create a desire for more diverse diets, requiring greater productivity in agriculture. This is not only good news for seed companies but also firms specialising in crop protection and agricultural machinery.
More food. Less land availability. An increased diversity of diets.
Such trends may allow the consumer greater choice and year-round availability in previously seasonal foodstuffs, but such preferences also heighten risks that extend beyond supermarket shelves and into the realms of macroeconomics.
Today such risks seem almost laughable, but it’s plausible this situation might change.
A recent UK supermarket price war has helped contribute to negative food price inflation in the UK, and in early September the United Nations’ Food and Agriculture Organisation noted that an index of 73 different food prices was at its lowest level since December 2008. But global risks do exist.
Our current El Niño weather event started with the innocuous warming of the waters in the central and eastern Pacific Ocean. In turn, changes to wind, water temperature and moisture distribution caused a series of alterations to regional climates across the world – and it is agriculture that is most exposed to these changes.
Previous El Niño cycles in 1997-98 and 2006-07 had widespread effects on agricultural markets.
Typically, more rain falls in South America, which, given recent drought conditions in Argentina and Brazil, may be perceived as good news. But this rainfall is offset in other parts of the world – notably Australia – which often suffer extreme droughts affecting both crops and livestock.
Meanwhile, the Indian authorities have noted that major droughts over the past 130 years have always been accompanied by an El Niño cycle – an important observation for an agriculture sector that represents 17 per cent of India’s GDP.
And India will be only one of a number of southeast Asian countries affected. Typically, there are other knock-on effects elsewhere in the world. The last El Niño cycle affected North America and eastern Europe’s agricultural production, too. Just under a decade ago this phenomenon pushed agricultural prices to all-time highs.
With food prices low, a move again to new highs is clearly unlikely, but there will be upward pressure on prices if the current El Niño cycle persists.
The National Oceanic and Atmospheric Administration’s Climate Prediction Centre reports a greater than 90 per cent chance of the El Niño lasting until the spring of 2016.
Higher food prices, as weather disruption affects production, are the most likely immediate impact of a significant El Niño.
Hard-pressed supermarkets may see this as an opportunity to raise prices, but for the world’s central banks this occurrence is likely to cause a real policy conundrum.
Headline inflation rates in most parts of the world are very low thanks to low energy and food prices, but underlying ‘core’ inflation rates that ignore both of these factors are still slowly pushing upwards.
