How will rising food prices affect economic growth?

Although in the UK the price of food fell 0.5% between March and April 2014, according to the Office of National Statistics (ONS), the price of food globally is rising.

The ONS Consumer Price Inflation report figures stated that over the past five years, food and non-alcoholic beverages had been one of the three main contributors to the 12-month inflation rate.

‘The 12-month inflation rate for food & non-alcoholic beverages is currently at its lowest level in eight years. However, over this period, prices for these goods have increased more than half as much again as the all items Consumer Prices Index (44% compared with 26%),’ the report said.

Desmond Cheung, portfolio manager and member of Blackrock’s natural resources equities team, said despite the decreases, food prices still remained on an overall high level.

‘Taking a glance at the evolution of prices of different food categories over the last 25 years, there is a clear pattern that all types of foodstuffs have gone through an upward trending trajectory. At times, the trend was exacerbated by price spikes during periods of supply disruption. While prices tend to moderate from sharp spikes, they have been making ‘higher-lows’ over time,’ he said.

But what drives those prices?

‘First and foremost, long-term food price inflation is driven by consumption growth on a global scale. Demand for food has exhibited consistent growth through different economic times. For instance, grains and meat demand has continued to grow steadily in the last few years in spite of the global economy being under pressure,’ Cheung said.

A growing population worldwide and the economic growth in emerging markets are among some of the main drivers of demand.

According to United Nations’ (UN) estimates, the world’s population will reach 9 billion by 2050. UN Food and Agricultural Organisation (FAO) has stated that net investments of US $83 billion a year must be made in agriculture in developing countries if there is to be enough food for 9.1 billion people in 2050.

At the same time, the aspirational middle class in the developing world has increased the demand for protein-rich food, such as meat, which in turn has increased the demand for grain for feeding livestock.  According to OECD – FAO Agricultural Outlook for 2013-2022, developing countries are expected to account for 80% of the growth in global meat production.

In addition to the wider economy, Cheung said food price inflation would have implications for investors.

‘For investors with exposure to emerging markets, the significance of food inflation in the CPI calculation and the proportion of income spent on food can have an impact on government policies and the ability of consumers to spend. Beyond that, the uncertainty on food input costs creates challenges to food companies’ earnings.’

For UK investors, the rising global food prices are just as relevant as those in the UK, as they have strong implications on the growth of developing countries, which represent an increasing share of global economic activity. Rather than just an appeal for humanitarian aid, feeding the world is in the interest of anyone looking to preserve global economic progress.

Article appeared in the New Model adviser on 6th June 2014