Broader food inflation globally and in SA may have eased but global agricultural commodity prices remain high. Felix Odey, portfolio manager at Global Resource Equities at Schroders, looks at what this means for the food and water space internationally and what to expect next...
Broader food inflation globally may have eased since the start of the war in Ukraine. According to recent Stats SA results, food and non-alcoholic beverages inflation (NAB) continued to trend downward for the fifth consecutive month to 4.7% y/y in April but pockets of hyperinflation in agricultural commodity markets are becoming increasingly common.

Just look at what happened in the cocoa market. Cocoa prices have experienced a remarkable surge of 160% year to date and 320% since the beginning of 2023.

This was due to a mix of supply issues, disease outbreaks, inadequate prices for farmers, and persistent high prices driven by strong demand.

But this story is not in isolation.

Farmers in many countries are not paid adequately to encourage the adoption of technologies or methods that maximise production. Meanwhile, many important crops are concentrated in regions like South America. This geographical concentration means risks such as disease, extreme weather, and geopolitical disruption can have an outsized impact on supply.

These are risks that can have huge implications for food prices, and wider global inflation.

We have seen similar, albeit less extreme, cases in the last few years.

For example, the drought across the Mediterranean has pushed olive oil prices up 230% since the start of 2020, with Spain’s production expected to halve this year.

Crop dependence and security

The world is incredibly dependent on three to four species of crops - 48% of calories are sourced from wheat, corn, and rice, and 60% of protein when soy is included. This concentration creates risk of a new disease affecting any one of the crops having potentially disastrous global implications.

The importance of developing a food and water system that can sustainably grow to meet global demands, eradicate malnutrition, and ensure greater food security is often overlooked by investors until after an event like we have seen in the cocoa market.

Companies that can mitigate risks through their activities will gain importance in the global economy and investors’ portfolio.

So, what are the nearer term expectations for the food and water value chain? So far, 2024 has highlighted the potential divergence of central interest rates, as labour markets loosen more quickly outside of the US.

This has had implications for consumer strength, with volumes largely expected to grow or at least stabilise this year for B2C (business to consumer) companies, such as food retail and technology.

As predicted, aquaculture markets have continued to see strong demand, and relatively tight supply, resulting in salmon prices remaining high. Tighter labour markets will be a drag on farmer incomes, as will persistently higher interest rates given the higher interest burden.

Valuations and earnings expectations remain subdued for much of the food and water system hitting five-year lows in terms of forward valuation, while the MSCI All-Country World Index (ACWI) continues to re-rate and trade at very high multiples.

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