It might not feel like it after years of rising prices and shrinking chocolate bars, but in most developed countries, food is still pretty cheap. It makes up just 10 per cent of the average weekly spend for UK households, official data shows, and has trended downward for decades. But farmers across much of the world are under pressure. What happens if the era of cheap food comes to an end?
A summer of extreme weather in the northern hemisphere is a preview of the potential impact of climate change: tens of thousands of hectares of farmland were caught in wildfires in continental Europe, while British farmers are preparing for “one of the worst ever” harvests, according to the head of the National Farmers’ Union.
Next, an unusually strong El Niño weather pattern threatens to disrupt agriculture across South America, Africa and Asia. Research by a team of scientists and European Central Bank economists estimated that climate-related shocks could add between 0.9 and 3.2 percentage points to the annual rate of food inflation around the globe by 2035. That would lift headline inflation rates by between 0.3 and 1.2 percentage points.
Climate aside, farmers in the US have predicted the worst downturn in 40 years as war drives up fuel and fertiliser prices. Add on rising labour costs, growing populations and weak profitability that makes it hard for farmers to invest in the future, and analysts at UBS argue the world is heading for food inflation “structurally higher” than the historic average of around 2.5 per cent.
If they’re right, the impact for investors would be wide-ranging. The UBS research highlighted more than 100 listed groups it could impact: positively for Sweden’s Alfa Laval, for example, which supplies equipment for dairy farms; negatively for retailers and hotel groups like Next and Accor that would lose out if consumers cut discretionary spending to keep up with higher food prices.
That only covers companies with relatively direct exposure, but potential knock-on effects could be much broader, and affect whole economies. Central bank rate-setters often look at “underlying” measures of inflation that exclude food, but for consumers the weekly shop is a key benchmark of price changes. If they start pushing for wage hikes, it could nudge monetary authorities to start raising rates. Suddenly, in that scenario, a poor harvest in Brazil is impacting mortgage rates in France.
Environmentally-driven investing has fallen out of fashion recently, caught up in the backlash against social and governance issues. But thinking about the climate is not a feel-good fad. Permanently higher food inflation would be a structural shift with economic consequences as far reaching as the development of AI or the spread of GLP-1 drugs. What does an investment portfolio have to do with the price of eggs? A lot, it turns out.
