China & Global Warming - affecting our food prices?
By Eamon Bermingham, Associate Director, Pegasus Financial Services Ltd
When people think of commodities they usually think of Oil or Gas or Metals such as Copper, Zinc etc the prices of which have been at or near record highs largely due to demand from China and India. These are known as hard commodities but experts are predicting that agricultural or ‘soft’ commodities Coffee, Meat, Wheat and Corn are in the early stages of a long term bull market again due to demand from China and India and shortage of supply due to adverse weather conditions (Global Warming).
While emerging economies require hard commodities to build infrastructure to support the growing population they also require soft commodities to feed them.
In China alone 800m people (more than the population of the EU!) are forecast to move from the countryside to the cities by 2020 and as a result their disposable incomes will grow. One of the first things people do as their disposable income increases is improve their diet. This should result in the Chinese decreasing their rice intake and an increasing their meat consumption. All of which will have huge implications for soft commodity demand and prices.
Currently the Chinese consume approximately 300kg of grain each with Americans consuming nearly 3 times that as the meat they consume is fed grain, Chicken and Beef. Currently Americans eat over 250kgs of meat a year and if the Chinese were to do the same this would equal four fifths of global meat consumption!
As the Chinese become wealthier and begin to lead a more Western lifestyle other soft commodities, like Coffee (Germans consume nearly 50 times more coffee than the Chinese) and Sugar will be in huge demand and this is without factoring India into the equation.
Soft commodities will also play a big part in alternative fuels. Sugar, Corn and Coconuts are used as the basis for bio-ethanol and bio diesel. Governments globally are being pressured to cut carbon emissions (car tax in the UK is now based not on engine size but the emissions from vehicles) all of which should keep the prices of soft commodities on an upward trend.
Adverse weather conditions in the past 12 months have also played a part. Australia is the sixth biggest exporter of agricultural produce and has experienced its worst drought for more than a century. America is bracing itself for another hot and dry summer. All of this has lead to increases in food prices globally prompting some countries to cite it as a reason for raising interest rates. The Investment Managers we are speaking to are taking more and more exposure to soft commodities with some managers investing as much as 5-10% of their portfolios in commodities.”
While soft commodities are on an upward trend they remain a volatile asset class and should only be used as part of a diversified portfolio. For further details on how to obtain access to this asset class and others please contact Eamon Bermingham at e.bermingham@pegasus-fs.com , visit www.pegasus.com/spain or contact your Pegasus Spanish representative offices.