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In the spirit of quarterly updates, it's time to take another look at food prices. When we last checked in with the supermarket - right after the New Year - we expressed shock and dismay at the rise in staples like eggs and milk. I mean, eggs had risen 38% in just 15 months! Imagine!
Of course, that ain't nothin' compared with the last few months.
Food prices are rising everywhere - which comes as no surprise to anyone following agricultural commodities. The past few months have seen "beans in the teens" and wheat over $12 a bushel. Corn hit $6 a bushel last week and rice is up over $20. With all of these commodities at or near record highs, food producers have no choice but to pass along their rising costs to the consumer.
Behind the prices are the usual suspects. As always, it's supply and demand. Increased wealth in developing nations like China and India translates into higher consumption of meat, grains and wheat. The growing popularity of biofuels to offset energy costs and global warming sets up the competition between crops for food and crops for energy production. Global stockpiles of most grains are at all-time lows, supporting the higher prices. And supply hasn't been rosy either: half the world seems to be suffering from droughts, which cuts harvest yields, and the other half is dealing with the opposite problem - Bangladesh is still reeling from floods and typhoons, and rain could delay corn plantings here in the U.S.
And of course, there's always oil. Agriculture and crude oil go hand in hand, with high oil prices translating into higher transportation and fertilizer costs. And where do the effects of all these trends ultimately have an impact? Your grocery cart.
At Home ...
Here in the U.S., an informal survey conducted by the American Farm Bureau every quarter, shows a basket of 16 common grocery items increasing 8% between the fourth quarter of 2007 and the first quarter of 2008.
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Q4 2007
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Q1 2008
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change
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% change
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flour, 5lb bag
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$ 1.70
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$ 2.39
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$ 0.69
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41%
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cheddar cheese, 1lb
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$ 4.10
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$ 4.71
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$ 0.61
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15%
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corn oil, 32oz
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$ 2.43
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$ 3.01
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$ 0.58
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24%
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eggs, 1 doz
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$ 1.61
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$ 2.16
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$ 0.55
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34%
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vegetable oil, 32oz
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$ 2.25
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$ 2.63
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$ 0.38
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17%
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mayonnaise
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$ 2.92
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$ 3.14
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$ 0.22
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8%
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potatoes, Russet 5lb bag
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$ 2.29
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$ 2.47
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$ 0.18
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8%
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white bread, 20oz loaf
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$ 1.62
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$ 1.78
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$ 0.16
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10%
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apples, 1lb
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$ 1.27
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$ 1.40
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$ 0.13
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10%
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whole chicken, per lb
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$ 1.28
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$ 1.37
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$ 0.09
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7%
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ground chuck, per lb
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$ 2.69
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$ 2.73
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$ 0.04
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1%
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bacon, per lb
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$ 3.35
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$ 3.35
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$ -
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0%
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whole milk, 1 gallon
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$ 3.91
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$ 3.81
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$ (0.10)
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-3%
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pork chops, per lb
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$ 3.39
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$ 3.31
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$ (0.08)
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-2%
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toasted oat cereal, 9oz box
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$ 3.05
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$ 2.97
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$ (0.08)
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-3%
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sirloin tip roast, per lb
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$ 3.85
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$ 3.80
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$ (0.05)
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-1%
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Basket Total
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$ 41.71
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$ 45.03
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$ 3.32
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8%
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The media is full of stories of how Americans across the country are dealing with higher grocery bills - from shopping at discount grocers (Wal-Mart looks like a big winner here) to clipping coupons, to eating less meat. American consumers are feeling the pinch of higher food prices.
... and Abroad
From a GDP perspective, the U.S. has it easy in weathering food inflation. Food is only 7% of overall economic consumption. But in Asian economies like China, India and Vietnam, food costs account for anywhere between 30‒50% of overall consumption. Every uptick in food prices has a vastly more significant effect on local economies than here at home. United Nations records show global food prices rising 35% in the past year, with grain up 42% and dairy up a Marge-let's-buy-a-cow, eye-popping 80%. The world's poorest countries are facing very real fears of food shortages, and even the not-so-poor are acting to ensure food supplies and attempt to rein in food inflation.
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The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.
During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)
We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
- Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
- Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981
Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions. The team currently manages a group of private equity funds with almost CAD$ 100 million of assets under management and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.
The Canadian farmland investment premise is driven by several key points:
1. Canadian farmland is high quality: Canada is the third largest wheat exporter in the world and in aggregate one of the largest agricultural producers in the world. The three western Canadian provinces alone have approximately 135 million acres of farmland and produce approximately 20 million tons of wheat a year.
2. Canadian farmland is low cost: Agcapita believes Saskatchewan farmland in particular is an undervalued asset. With an average price of $390 per acre, Saskatchewan farmland is some of the least expensive in the world. The prices in Alberta are almost 3 times higher than Saskatchewan at an average of $1,000.
3. Canada has world class farming infrastructure: Unlike investing in farmland in emerging markets such as Argentina, Brazil or Russia, Canadian farmland is supported by first world storage, processing, and shipping infrastructure. This infrastructure is extremely costly to reproduce.
4. Canada has low political risk: Unlike emerging markets, Canada lacks significant political risk. Canadian farmland owners benefit from a transparent and enforceable title system with no material risk of de jure or, worse yet, de facto expropriation. See recent agriculture export tariffs in Argentina.