STANDARD CHARTERED BANK equity analyst Nirgunan Tiruchelvam is a strict vegetarian. Lately, however, he has been all agog over meat. You see, he covers food stocks such as Thailand’s Charoen Pokphand Foods and the unrelated PT Charoen Pokphand Indonesia (owned by the younger brothers of Thai billionaire Dhanin Chearavanont), which have a huge exposure to the feed and meat supply chain. Tiruchelvam believes investors who are chickening out in choppy markets might soon find solace in, of all things, chicken.
With equity markets reeling and the world’s most developed economies from the US to Europe and Japan skirting very close to a doubledip recession, commodity prices, particularly those of minerals and metals such as iron ore, copper, aluminium and nickel, as well as oil and gas, have corrected sharply over the past four months. Last week, copper prices plunged to a 10-month low of US$8,028 a tonne and aluminium prices touched a ninemonth low of US$2,284 a tonne. Nickel, zinc, tin — name any metal and you can be sure it’s sliding.
Softer commodity prices have been a little more resilient, though. Demand is holding up better for softer commodities, and supplies are tighter than they are for harder commodities such as metals. Not only are increasingly more affluent Indians, Chinese, Brazilians and Indonesians eating and dressing better, but the lack of arable land and farm hands as well as higher costs of shipping agricultural produce from one corner of the world to another has been a key driver of prices. Eliane Tanner, commodity strategist at Bank Sarasin, predicts that agricultural commodity prices are likely to remain high because of tight supply and high demand, despite the current softer patch in the global economy.
Then, there is food being used for fuel and furniture. Commodities such as corn and sugar cane or vegetable oil such as palm oil are being used to make biofuels, and soybean farmers in Brazil are increasingly feeding the foam mattress industry alongside kitchens in China.
Across the food chain, there are shortages developing and prices are likely to rise in the coming months irrespective of how soft the global economy is. Take rice, for example. Because of price-support measures put in place by the new government of Prime Minister Yingluck Shinawatra, rice prices are rising worldwide, not just in Thailand. Or wheat, where adverse weather conditions are affecting supplies and likely to push prices up further in the New Year.
Even with sugar, where there is a visible surplus this year, the bet among commodity analysts is that prices are likely to move higher rather than lower over the next few months. For one thing, the global slowdown has led to tighter credit, and that has hit Brazilian sugar mills hard. These mills need money for maintenance, upgrades and to buy more sugar cane from farmers.
Or take soybean. Again, China is the world’s biggest consumer and importer of soybeans, and increasing demand there and its need to buy increasingly more from the international market is changing the dynamics of the once dull and dreary soybean market.
Earlier this year, Beijing began cutting inventories and set a maximum price for vegetable oils as part of its efforts to counter inflation. That hurt Chinese producers of soybean oil. It also depressed domestic cultivation of soybeans in favour of more attractively priced agricultural commodities. Suddenly, China has a soybean shortage developing, which analysts say will only lead to higher imports of soybean, and heavier buying by China in the international market can only be good for soybean farmers in the US and Brazil.
Things aren’t too different with corn. China is now a net importer and, as demand grows in China, its imports of the grain are likely to grow. The China National Grain and Oil Information Centre announced recently that it would increase corn imports in the 2011/12 planting season by a million tonnes year-onyear to 2.5 million tonnes. Standard Chartered Bank expects corn prices to rise to an average of US$6.95 a bushel by year-end — a sharp increase from the average of US$4.28 a bushel last year.
Bank Sarasin’s Tanner notes that, against a backdrop of higher demand, insufficient supply is likely to support prices. The weather has not been good for corn and soybean farmers in the US, with the occurrences of a heat wave and lower rainfall this year, which only means tighter supplies even though planted acreage in the US this year was actually up 5%. In many parts of the world, farmers are already switching from soybean to corn because corn gives better per-acre returns. Tanner believes that, if soybean prices don’t increase soon, supplies could be even tighter next year.
Higher food prices don’t bode well for inflation at a time when economies in Asia are starting to feel the impact of the slowdown in the US and Europe, with lower demand for their goods and services. Clearly, the last thing Asian policymakers need right now is the spectre of rising food inflation. If it gets worse, it could become a chicken-and-egg dilemma for them. Do they rein in inflation or do they keep monetary policies loose to cushion against a global slump?
It isn’t just demand for agricultural produce that is going through the roof and that could be the next major trigger for inflation. The hottest thing in Asia right now, if you ask analyst Tiruchelvam, is chicken. Take, for example, Southeast Asia’s largest economy, Indonesia, where chicken consumption has been rising at an average of 6% a year in recent years. As incomes rise, Indonesians are eating more protein. Although it is one of the cheapest forms of animal protein, chicken consumption is still just 33% of total meat consumption in Indonesia. As supply chains improve, more Indonesians will get a taste of poultry. Yet, higher demand for chicken will only lead to higher prices for animal feed, and still-higher chicken prices.
Still, there is a way for investors to play the food inflation and soaring demand story. As Tiruchelvam sees it, Asian companies that control an increasingly bigger slice of the overall food supply chain — from feed and chicken farming and processing to wholesaling — are going to be key beneficiaries of the boom that’s driving food prices.
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