The controversial food price decline

Average food prices have declined over the past four years, according to the Food and Agriculture Organisation. But how long will it last? Duxton’s Desmond Sheehy argues the case for food price hikes.

Average food prices have declined over the past four years, according to the Food and Agriculture Organisation (FAO). In a recent statistical report, Food and Nutrition in Numbers, the organisation showed sharp price decreases in agricultural commodities such as sugar and oils, a volatile ride for dairy and a more muted decline for cereals.

FAO org food prices









Source: Food and Agriculture Organisation

The FAO welcomed the pricing shift as a positive for emerging market populations.

“The impact of high and increasingly volatile prices falls heaviest on the poor, who may spend as much as 80 percent of their incomes on food,” reads the report. “The lack of dietary diversification aggravates the problem, as price increases for one staple cannot easily be compensated for by switching to other foods. In addition, farmers are less likely to invest in measures to raise productivity when price changes are unpredictable. The recent significant declines in food prices should help ease these problems.”

But declining food prices are not a positive for rural populations – still in the majority in many of the poorest emerging markets – or the agriculture investment market, argues Desmond Sheehy, chief investment officer of Duxton Asset Management, the Singapore-based agriculture asset manager. Food prices must correct upwards, he added.

“There is a lot of focus placed on feeding the urban poor which means that governments tend to keep food prices down to limit unrest,” he told Agri Investor. “But this means that the rural farming poor are essentially subsidising the urban poor.”

“A food price correction is bound to take place at some stage when the global population wakes up and realizes that the finite world will need to feed an increasing population,” he continued. “This is what has happened when you look at energy prices. [Increasing food prices] will of course encourage more efficient distribution chains and farming methods, which will help bring food prices lower at some stage, but they will remain volatile. Farmers, especially the poorest ones, will need to be incentivised to produce food for hungrier urban populations with rising incomes.”

While increasing food prices will automatically push up land prices too, agriculture investors that have secured food-producing companies will be in a better situation, argued Sheehy.

“We have noticed some sovereign-related investors and wealth funds are now hesitating when making purchases of land overseas and are now focusing on buying foreign food companies so that when the price correction upwards happens, they will be able to feed their own population with the profits made overseas,” said Sheehy. “They need money, not food. There has never really been a time when large populations of rich people starved.”

Buying food companies instead of land also gets rid of the political risk of buying agriculture land overseas, added Sheehy. Owing foreign food companies “instead enables the investor to feed local populations in the countries in which they invest while making a profit. Buying distressed food-producing companies is one strategy we have noticed,” he said.