From farm to table, we are seeing the food supply chain being disrupted.
The urgent need to address climate change
has already affected the way we think about the production and distribution of food.
Meanwhile, Russia’s invasion of Ukraine, which has become the largest European conflict in decades and is having a horrendous human toll, has also exacerbated some of the issues in the global economy that was already recovering from the shock of Covid-19.
Clearly, there is a huge amount of volatility in almost every asset class, from government bonds to equities and commodities. But how should we be thinking about this in the medium term? I think the food supply chain is a good place to start.
Russia and Ukraine account for nearly 30 per cent of global wheat exports. Both countries are net exporters of agricultural commodities and rank among the top three exporters of wheat, corn, rapeseed and sunflower oil. Other big exporters of wheat include America and Canada. Since the invasion of Ukraine on February 24, wheat prices have increased by roughly 21%.
According to the Food and Agriculture Organisation of the United Nations, the global supply gap resulting from the war could raise international food and feed prices by 8% to 22% above their already elevated baseline levels.
One issue that has already been affecting food prices has been the focus on emissions through the food production and distribution networks. This includes emissions from things such as
meat production and the transport of these goods from the field to the market.
This is an industry that was already seeing significant disruption. We can see it right from the development of autonomous tractors and foodstuffs for animals to reduce emissions, to
the use of fertilisers and chemicals that are less harmful to ecosystems. The increased focus on scientific and technological development will be absolutely crucial and become areas of investment in the future.
In food distribution, we will see production closer to market to reduce the need for international travel. That has some ripple effects. Some emerging economies rely on the export of these foodstuffs and if we do not import from these countries, they are going to suffer.
On the other hand, the road to zero carbon emissions is a conflicting objective. Over the next five to 10 years, we are going to need to balance the economic needs of developing countries with the environmental needs of the whole world.
There will be investment implications as that disruption and transition takes place.
At the front end of the food chain, retailers may have to pay a higher price if governments reduce farmer subsidies. This could result in an increase in prices for the consumer as retailers push back.
The other market that is being clearly impacted by the conflict is energy – a sector that was already under the microscope because of climate change and the political will to move to net zero emissions.
In my view, it is encouraging to see so many governments coalesce around the need to have net zero emissions, but it is less obvious how we actually get there. There is a huge debate on transition and that is going to evolve over the next few years as decisions are made around what energy sources are acceptable under the new taxonomy.
Whatever the answer, there will be a lot of capital allocated to transitional technology. Although some will succeed, some of it will not work. And whenever you have disruption in
a sector, there are failures and successes, so
it is important not to get caught up in the hype, because the first mover is not always the winner.
Both the energy and the food markets are ripe for disruption for the same reasons, but how
that is achieved will be different. In each case,
I suspect the transition will take longer than people hope for.
In addition, in both cases we will need to create
a balance between the economic needs of the less well-off and the environmental needs of the globe.
With all of this in mind, we added an agricultural business ETF to our equity portfolios, which includes stocks such as John Deere, manufacturer of autonomous tractors; Nutrien Ltd, the world’s largest provider of crop inputs, services and solutions; and Archer Daniels Midland Company, a leader in global nutrition. We also own a broad basket of commodity ETFs, including industrial metals, precious metals,
and oil and gas. Although renewables will be the dominant force in the long term, we think fossil fuels will still be a mainstay of economic activity for at least another decade or two.
David Coombs is head of multi-asset investments at Rathbones.
