Food commodities the way to go

Food commodities are widely tipped to be the smartest medium-term move for investors, regardless of what the ever-optimistic gold bugs have to say about their favoured commodity.

Although food commodity prices have come down since the global financial crisis hit virtually all investment markets, conditions exist that argue they must go up again.

What emerges is a situation that has all the hallmarks of longstanding ethical arguments against supposedly evil capitalism, insofar as those who invest in food appear to be buying a one way ticket to a killing, whereas a fair proportion of those who need to buy the same food stand a strong chance of starvation.

He who has the gold gets to eat everyone else’s lunch.

A huge ethical dilemma is emerging over who owns and therefore controls food.

A guide to which food commodities count as essential (in contrast to our country’s dairy commodities, which do not, because who absolutely needs to consume milk and its by-products outside of the Masai tribes in Kenya?) is the Dow Jones-UBS Commodity Index.

The index includes all the food commodities that meet the twin tests of having the most liquid futures markets and the most valuable production worldwide as counted in US dollars (both calculated on a lagged five-year average basis).

Using this filter, Dow Jones and UBS have come up with the following list of food commodities that matter globally to food consumers and investors alike:

• Coffee
• Corn
• Lean hogs
• Live cattle
• Soybeans
• Soybean oil
• Sugar
• Wheat

Now of course not all of these food commodities have a do-or-die patina about their cheap accessibility to all and sundry.

It is possible, for example, to cut down on the sugar, and if civilisation is about to collapse then perhaps the espresso can be foregone so long as the wine keeps flowing.

We can even turn vegetarian if steaks and bacon enter the price bracket nowadays associated with civilian space travel.

Unlikely, though, is eschewal of grains – corn, soybeans, and wheat – upon which agrarian society and ultimately urbanised civilisation is based, and with that we might include a vegetable oil such as soybean oil, because we are likely to need it for cooking unless we consign ourselves to a diet of dessicated porridge in a desertifying world.

Grains are a bit tricky though, because they can either be consumed directly as food by humans, or else converted to feed for livestock such as cows and pigs, which just happen to be the biological substrates for lean hog and live cattle commodity markets.

And as might be expected, there are those with the extra cash willing to buy grain-fed beef and pork, thus competing indirectly with the veggos content or resigned to getting by gnawing their way through gruel.

Yet there are other competitors for grains: the biofuel consumption economies, most importantly the US and the EU.

These two mega-economies have decided in their wisdom that food commodities should be incinerated as vehicle fuels in order that “bad” fossil fuel consumption can be reduced.

Their laws now require that biofuels dilute petrochemical fuels.

Both loudly espouse the morality of their policy positions on a broad range of issues, so if they believe that inflating food prices in order that their motorists can sleep easier at night in their feather beds is a virtuous cause, then surely it must be true.

Add into this mix that rising oil prices increase the cost of food production because of petrochemically-derived inputs - fuel and fertiliser - and that oil too is set to lift again in price, then off we go into another food commodity inflation spiral.

Moreover, as oil gets more expensive, biofuel substitutes, including not just grains but sugar, go up in price with it.

The promoters of the next food commodity bubble can’t wait for all this to begin.

For example, Hedgeweek magazine has just put out a special advertorial report on the NYSE Liffe commodity futures exchange entitled “Evolution and opportunities in commodities and OTC derivatives trading.”

In an article therein - “Commodities trading: If you build it they will come” – we learn:

“The long-term trends in soft and agricultural [ie., food] commodities will provide some of the most exciting trading and investment opportunities across all asset classes in the next decade.”

“NYSE Liffe has already experienced remarkable growth in the trading of these commodities and has embarked on a development programme to provide market participants with the necessary products and trading infrastructure to take full advantage of the opportunities still to come.”

Good to see NYSE Liffe on the case, selflessly ensuring that speculative opportunities in food commodities will not go wanting for those whose tabs run to them.

Quoted within the article are enthusiastic, fleshy-faced American boosters of this outfit, who have briefly interrupted their esurient pleasures in the Big Apple’s finest restaurants to reassure readers that they too can dine out high on the lean hog.

By contrast, the poor won’t be able to afford to lick the dirt from off the hog’s gilded trotters.

In the same article, the United Nations’ Food and Agriculture Organisation (FAO) is approvingly quoted from its reports forecasting shortages of food and the means to produce it in the face of rising demand, especially from emerging market economies.

It might not have been a smart manoeuvre for NYSE Liffe to invoke the FAO’s research, as for some time now the UN organisation has been predicting impending disaster as food commodities are priced off the market for the poorer sections of humanity, including even those in developing and emerging market economies who produce the stuff to begin with.

For example, in a recent report, “The State of the Commodity Markets 2009: High food prices and the food crisis – experiences and lessons learned”, the FAO advises in a chapter headed “The impacts of high food prices” as follows:

“The impact of high food prices is obviously most severe for the poor who rely on purchased food,” the report states.

“For the poor in developing countries, food can account for at least 50 percent and up to 70–80 percent of their budget.”

“Thus, higher prices affect not only their food consumption in terms of quantity and quality, but also their spending in general.”

“The most visible indicator of this negative impact was the social unrest and rioting that erupted around the world triggered by soaring food prices.”

Continuing in this vein, the report goes on to say, “The evidence suggests that most households in the developing world and especially the poor are net buyers of food, and this holds even for rural households that are mostly engaged in agriculture.”

“Whether urban or rural, it is the poorest of the poor who spend the largest share of their income on food and who have no access to assets such as land who suffer most.”

“Female-headed households figure disproportionately on both counts, so the negative impacts of high food prices also have a gender dimension that needs to be addressed in policy responses.”

NYSE Liffe has the derivatives to meet demand on at least one side of this problem, it reassures us, but we can safely assume that pro- and anti-capitalist forces are already shaping up for their next big stoush over the respective merits of winners and losers from the soaring price of food.