Geopolitics of food

Jonathan Marriott, Chief Investment Officer

Earlier this month, inflation in the US moderated from a 40-year high. Meanwhile in the UK, the impact of the energy price cap increase was pushing inflation to its 40-year high on this side of the Atlantic. As such, central banks remain a long way off of their 2% target. Comments from US Federal Reserve (Fed) Chair, Jerome Powell, indicate that the Fed will continue to raise interest rates as they prioritise the fight against inflation. This has, subsequently, unnerved equity markets.

However, not all interest rates are going up. The People's Bank of China announced a larger than usual cut of its 5-year loan prime rate towards the end of the week. China remains at a very different phase of the pandemic. This rate is used for mortgages and the cut will help to counter economic effects of the continued shutdowns by hopefully boosting the housing market. The problem for western central bankers is that supply chain issues continue and, while they can influence demand, they cannot do much about the supply side of the inflation drivers. The war in Ukraine has made this much worse as oil and gas supplies are threatened. As the war continues, food shortages are becoming a bigger concern. Bank of England Governor, Andrew Bailey, commented that the threat to the developing world of food shortages could be “apocalyptic”. The World Bank pledged a further $12 billion to support low-income countries hit by food shortages.

Ukraine is a huge exporter of grain and has been referred to as the breadbasket of Europe. Belarus and Russia are big exporters of fertilisers. Wheat futures prices are up over 50% this year and some fertiliser prices have doubled. In Ukraine, part of last years crop cannot be exported with the Black Sea ports, such as Odessa, closed. In the next two months, they will start to harvest the wheat crop planted before the invasion. Compounding the issue is the limited storage capacity. Against this backdrop, India announced this week that it was banning the export of wheat, pushing the global prices even higher. They join a list of countries restricting the export of agricultural products. Food shortages and higher prices threaten political stability. We have already seen this in Peru, Pakistan and Sri Lanka. This week, Sri Lanka defaulted on its debt payments having been hit by a lack of tourist income during the pandemic and now high prices and political unrest. Developing countries need continued foreign investment but events like this deter investors, compounding these risks.

Raising rates at a time of rising energy and food costs impacts the poorest in society everywhere. Low-income households spend a higher proportion of their earnings on heating and food than high income households with greater disposable income. As prices rise, this disparity only grows. Central banks set inflation targets and, with monetary policy as their primary weapon, they are obliged to raise rates in response. This will not help the supply issues dogging the food market. Indeed, rising interest rates may discourage farmers from paying more for fertiliser and investing in higher production.

While we impose sanctions on Russia, the damage caused by food shortages and higher prices will be felt globally. More countries like India may restrict exports to keep domestic price pressures low, while pushing up global prices. For investors, food security and changing spending patterns will be important considerations in the months to come. Sri Lanka is unlikely to be the last country to default and political instability may rise. In particular, if investing in emerging markets, a highly selective approach will be appropriate. For developed market investments, we need to be aware of changing spending patterns and look for companies that have pricing power and can maintain margins as input cost prices rise.

Rising food costs will impact not just NATO countries but many other countries that have so far acquiesced during the invasion. The war is expensive on all sides and Russia will be conscious of not wishing to alienate its remaining trading partners.