We are in a global food crisis.
While food prices have eased somewhat from the highs of March April, they are still 43% higher than 2020 levels (as measured by the FAO index). Though the rise is widespread, grains have been to the fore in pushing higher. In lower income countries, where food makes up a large portion of consumer spending, it is hard to compensate. In Egypt, food accounts for over a third of household spending. In Ethiopia that figure is 38%; Mozambique 60%!
It has never been more expensive to be poor, according to Oxfam
But the statistics too readily bleed from the page to mind pictures of what this actually means – 770 million people went hungry in 2021.
2022 will be higher
2023 will be higher again.
A leaked UN email speaks of 60 countries struggling to afford food imports this year. This is all coming after a 6 year period of low and often falling foodstuff prices.
This doesn’t feel temporary. This is not just because of the war – there are multiple major causes behind it. Broken economies due to Covid, widespread droughts and dismantled supply chains are all part of the cause. Some analysts believe the true impact of this combination will only become apparent next year.
So, where do Pension funds come in?
Most major pension funds today invest across a wide range of assets and look for those assets which may perform at different times and so reduce the overall portfolio risk. Commodities have been one such “alternative” asset class that investors have looked to. While energy and metals were the mainstay of such exposures, many of the leading players in this field looked to include agri-products such as grains, oilseeds and other soft commodities from the early 1990’s. It’s been a target for investment funds generally. It is estimated that the number of investment funds backed by agriculture grew from fewer than 50 in 2005 to over 600 today.
One possible question is does institutional investment in commodities push up prices, to the detriment of subsistence farmers in the Horn of Africa who requires seed for next year’s crop.
Some may argue that much of this investment is in swaps, ETFs or futures rather than direct, but ultimately upward pressure in derivatives can lead to arbitrage opportunities and actual buying of commodities. S&P noted a net long position of over $50 billion in agri-commodities in the middle of this year – a huge amount of buying by investment funds. The corresponding figure in 2019 was a net “short” $13 billion. Analysts have shown that the degree of speculative as opposed to fundamental activity rises dramatically as commodity price rises. Oxfam continue to liaise with many of the sponsoring banks to control and curtail this investment behaviour.
Standard & Poor view this institutional buying as a “contributing factor in pushing prices higher”.
Pension funds should also apply laser focus to any hedge fund holdings they may have in their “Alternatives” category . Many hedge funds have a “go anywhere” mandate and may look to generate returns as global food prices rocket. This can be less easy as exposures are often opaque but should emerge in pre-emptive due diligence
Pension funds need to drill down to fully assess the impact of all exposures.
The impacts of the global food crisis needs to be assessed in the round. There are knock-on effects which investors in Emerging or Frontier markets need to be aware of. Soaring inflation and the inability to feed a family have in many cases meant an increase in social unrest which has implications for the risk assessment, investors should apply to any investment case for many of the “newer” emerging stock markets. Many such Emerging markets, still struggling to pay for Covid, have been beset by social and political unrest. The IMF Social Unrest Index has been rising steadily since 2021. Recent examples include Sri Lanka, Kenya and Nigeria.
By being diligent, Pension Funds can ensure they are not part of the problem, but there is also clear opportunity to be part of the solution.
Improving farmlands, greater access to agronomists, increasing yields, tackling irrigation etc. are all long term projects and ideally suited to the time frame for pension funds. There is a clear role for public and private finance here which can be sustainable into the future and produce financial returns.
Pension funds can have serious impact in this area.
As Pension funds wrap themselves in the mantle of Environmental , Social and Governance concerns, they should ensure that the reach of that impact is global and not just parochial.
Tradewinds 