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Markets and governments adjust to a world of food shortages and high prices

Food is going to be at the centre of politics and market debates in the months ahead. The disruption to grain and vegetable oil markets by the loss of exports from Ukraine and the sanctions on Russia has driven prices of grains up by a half, and some vegetable oils up by more, as people contemplate shortages.

| 6 min read

Food is going to be at the centre of politics and market debates in the months ahead. The disruption to grain and vegetable oil markets by the loss of exports from Ukraine and the sanctions on Russia has driven prices of grains up by a half, and some vegetable oils up by more, as people contemplate shortages.

The price signals should lead to farmers in many parts of the world planting some more of these crucial crops to take advantage. Unfortunately, in some cases, cash-strapped farmers will be constrained by the impact of the Ukraine war on energy and fertiliser prices. Successful crops with good yields rest heavily on substantial fertiliser inputs, which are very expensive to finance as the world scrambles for reduced fertiliser output. The weather also plays a part. High temperatures and no rainfall in India have cut back the yield of their present crop, leading the government to cancel most exports in an effort to conserve what they do grow for home consumption. Meanwhile in Ukraine, they cannot export the last harvest from their stores, leaving them without capacity for what is now growing. Farming there is also hit by the ravages of war and the need for some agricultural workers to turn from ploughshares to combat.

It is true there are substitutes for these products. Maybe the world can produce more rice and grow more vegetables. The problem is that these high prices for basics hit the poor hardest. Low-income countries face shortages because they lack the foreign exchange to buy the more expensive imports. Many poor people in low-income countries cannot afford the prices of what does get through. Low-income households in richer countries also struggle with their budgets. Richer countries have more scope to offer financial support to those in need, but some governments are worried in case borrowing more to do so will fuel their inflation further.

All this puts food prices and supply into the centre of politics in many countries. As if arguments over energy supply and the road to net zero were not enough, we now see some emerging market countries with food riots and advanced countries pausing to reconsider their environmental and farming strategies.

Sri Lanka has replaced a Prime Minister partly as a result of food riots, to be followed by a trip to the IMF to see if the country can be refinanced to grant it more foreign exchange to pay the import bills. Egypt is vulnerable as a heavy importer of grains from Ukraine. Argentina has seen her inflation rate surge to 58% with mass protests on the streets as the food bill adds to the worries of all the other bills that have risen as part of the great inflation.

The currencies of the food and energy importers amongst the emerging economies have been under pressure as commentators and investors consider who else might be at risk of needing IMF support or retrenchment, given the need for dollars to buy the dearer food.

Advanced country markets reckon with the impact of expensive food on inflation and the knock on to Central Banks that need to be tough enough to purge the inflation.

All this will lead to some rethinking on the topic of agriculture and land use. The advanced countries have become very relaxed about food supply in recent years. They have come to trust more and more to the global market and to rely on their ability to afford relatively cheap grains, oils, and meat from the large suppliers that specialise in factory farming. The US prairies, the Russian and Ukrainian grain lands, the Argentinian estancias for cattle have reduced the worry and lowered the cost of food. Suddenly there is a realisation that these sources of plenty may not be available for political reasons or may be damaged by war or weather.

Maybe more countries, more often need to produce their own home-grown food and have sufficient local resilience. Maybe too the advanced countries should shift to backing new technologies to make it easier to produce more food and should consider a better balance between environmental and food supply considerations. Perhaps the first duty of the state includes the need to feed everybody at sensible prices. There are issues over how much crop can be used to make fuels out of plant material, and how much land can be given over to wilding, trees, and carbon reduction projects.

There are plenty of technologies available to choose from to extend growing seasons, remove the climate variable, increase yields, and reduce inputs. The use of polytunnels, large scale glasshouses, and vertical-growing enclosed areas in urban locations can boost yields of fruits and vegetables and produce quality salads or fruits - removing the seasonal limitations of weather. Drones and intelligent tractors can sense field needs for fertiliser, water, and other inputs and direct the right quantities to the right places. Smaller amounts of fertiliser can be targeted on the roots of plants, avoiding lots of run off of fertiliser into nearby rivers. The effectiveness of insecticides can be improved whilst reducing the quantity used. Plant proteins can be fashioned into more meat-like products, cutting the costs of the finished food and reducing the inputs necessary to generate it.

Investors can buy into the makers of the smart farm machines, into the software to run the new farms, into the provision of new controlled growing spaces, into the new food products that drive change in agricultural plantings, and into the makers of the inputs modern farming practice require.

These opportunities will be worth pursuing when we see markets stabilise and move on from fears about inflation and recession.

Land itself has value driven higher by competition between development, green uses, and traditional farming. The pursuit of net zero will include more nudges to produce less meat and dairy and rely more on plant proteins. Someday, the governments will give more support and farmers will have more cash to spend on these improvements.

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Markets and governments adjust to a world of food shortages and high prices

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