Investment food for thought

With prices on the increase, some see this as a good time to invest in the food industry. It can be a volatile sector, however, and there are ethical issues too

A COMBINATION of rising demand from emerging countries, drought in the US, and the growth in the production of new forms of energy is pushing food prices to new highs. If you would like to offset the hit your wallet takes, you could hedge your bets by buying food-related investments. You could make a good return, but investing in commodities is not for the faint-hearted and there are ethical considerations to keep in mind.

Food prices have faced upward pressures for some time now, thanks to increased demand from the emerging middle classes in countries such as India and China, and the use of food, such as corn, in the production of biofuels – almost half of US corn production is now used in this context.

The situation was exacerbated this summer by a drought in the US, the worst to hit the midwest in 56 years. This alone pushed up the price of corn by more than 20 per cent in July, and investment banks, such as Goldman Sachs, are forecasting further hikes in the short term. Producers of consumer foodstuffs, including Nestlé and Kraft, have already warned that they will likely pass on the increasing costs to consumers.

In the long term, there is serious potential for the sector. Investors such as Jeremy Grantham, of the $100 billion Grantham Mayo fund, recommends a 30 per cent allocation to resource-related investments such as farms and fertilisers, while Warren Buffet has expressed a preference for the sector. Earlier this year, he said “productive assets” such as farmland will far outperform non-productive assets such as gold or currencies in the years to come.

“A century from now, the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton and other crops – and will continue to produce that valuable bounty, whatever the currency may be,” he said.

So if you are convinced of the merits behind the arguments, what are the options for Irish retail investors?

There are a number of ways of getting exposure to the food sector, including purchasing stocks outright, but the main option is to invest in commodities through an exchange-traded fund (ETF) or an index fund that is linked to commodities futures.

The advantage of having an allocation to commodities in your portfolio is that they tend to behave counter to traditional asset classes, such as equities. So, while stock markets have been treading water for the past number of years, commodities have been roaring ahead. This can bring risks, with some analysts warning of a potential bubble in the sector.