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Portefeuillemanagers over stijgende voedselprijzen

03-08-2012 | Visie | Corné Zandbergen

Maakt u zich zorgen, nu de rente op staatsobligaties zo laag is? Actief durationmanagement biedt beleggers de kans geld te verdienen in zowel bull- als bearmarkten, terwijl met tactische positionering kortetermijnwinst kan worden behaald.

(Dit is een Engelstalig artikel)

It is therefore important to invest in solutions, such as yield-enhancing innovations. In this note we interview the portfolio managers of three key equity capabilities, i.e. Global, Emerging and Agribusiness Equities on the positioning of their portfolios. Although they do not immediately expect a major economic impact, they do take food supply and demand imbalances into account in their portfolios.  
 
The US Midwest is the grain basket of the world, but certainly not the only one. In other areas the situation is also worrisome: in India, for example, the crucial June-to-September rains are late and have hit the sowing of some crops. Part of the expected shortages can be offset by other regions: Argentine farmers, buoyed by recent rains, are expected to surpass a previous corn harvest record of 22 million metric tons by reaping as much as 31 million tons in the 2012-2013 season. Brazil too will harvest its biggest-ever soybean crop in 2012-2013 and may well push the US as the world’s biggest grower.

Weather conditions in the US according to the Palmer Z Index, as at June 2012Weather conditions in the US according to the Palmer Z Index, as at June 2012
*The Palmer Z Index shows how monthly moisture conditions depart from normal. The maps show the geographical pattern of the moisture anomalies for the last 12 months.

Soaring soft commodity prices
Prices of both corn and soybeans soared to all-time highs by mid-July, with corn climbing more than 50% in the past four weeks alone due to the worsening drought, squeezing ethanol and livestock producer margins and chilling export demand.

Soaring soft commodity prices 
Source: Bloomberg

The UN Food and Agricultural Organization (FAO) has designed its own method of keeping an eye on food prices development and here the situation is less severe. Continued economic uncertainty and generally adequate supply prospects have kept international prices of most commodities under downward pressure, but the organization warns that growing concerns over adverse weather have been sustaining prices of some crops recently.

Development in food prices per year, 2008-2012
Development in food prices per year, 2008-2012
Source: FAO

FAO Director-General José Graziano da Silva warned that "Excessive food price volatility, especially at the speed at which it has been occurring since 2007, has a negative impact on poor consumers and poor producers alike throughout the world.” The New England Complex System Institute notes that after a certain food price threshold has been passed, more protests are likely. That threshold has not been passed yet, as it takes time for market commodity prices to be reflected in retail prices.

Portfolio implications
We asked three portfolio managers about their views on the risk of rising food prices and the relevant positioning in their portfolios.

Martin Jochum, fund manager SAM Sustainable Agribusiness Equities:
During the previous drought, which peaked in June 2008, food prices as measured by the FAO Food Price Index increased by a staggering 85%. Developing nations, where food costs typically absorb a significant portion of household income, were particularly hard hit.  Ensuing riots in over 30 countries, reaching from Bangladesh to Egypt and Mexico, are at least partially attributable to massive price spikes in basic food items.  Elsewhere, many producing nations, such as Russia and Argentina, sought to freeze prices and curb exports in order to facilitate sufficient supplies for their citizens.

These higher commodity prices have yet to filter through to the FAO Food Price Index, but we have little doubt, that they eventually will.  What we are seeing here serves as a reminder of just how fragile the food supply/demand balance is nowadays.

With prices subsequently settling on a high level, the 2008 food challenge actually never left us.  We have been - and remain - in a period of food prices which are not just higher by historical standards, but also the subject of increased volatility. Elevated pre-drought 2012 prices suggest that the situation could become even more precarious this time round.  We will have to get accustomed to spending a larger share of our income on our food basket. Developed market consumers will increasingly opt to shop for private label products to relieve their strained budgets. This however is an option their counterparts in emerging geographies do not meaningfully have.

We invest in solution providers along the entire agricultural value chain, which play an integral role in the long-term provision of food security that goes way beyond shorter-term commodity cycles. As long as food/feed/fuel channels continue to compete for the same agricultural commodities - and that in a world of climate change and notoriously unpredictable weather patterns - this food security challenge will remain with us.  Throughout the agricultural value chain, a more responsible use of resources (notably waste reduction) would help alleviate the situation.  More immediately though, technologies that help to extract ‘better’ harvests (fertilizers, seed protection, etc.) will prove most critical. The fund retains a pronounced position in these investment clusters. Examples are fertilizer producers Mosaic and Agrium, as well as Syngenta, which is active in seeds and crop protection.

Wim-Hein Pals, head of Emerging Markets Equities:
At the moment inflation rates across the emerging world are falling quite rapidly, to low single-digit levels in most instances. The recent increase in food prices could filter through and inflation rates could pick up slightly later in the year. However, the inflation environment in emerging countries in general and in emerging Asia in particular is rather benign. We do not expect a long lasting effect of the drought and subsequent rise in food prices.

Within the commodities space the food basket is more or less an isolated case; other commodities have not seen meaningful price movements recently. The most important commodity - crude oil - still trades significantly below price levels seen at the start of the year. And we do not foresee a 60% increase in crude oil prices, which we witnessed in the first half of 2008 for instance.

Robeco’s core Emerging Markets Equities strategy is positioned for a modest amount of food inflation. The fund has a substantial underweight position in consumer staples, such as food processors and brewers; a sector which is most vulnerable to an increase in its input prices linked closely to some soft commodities such as corn or soy. At the same time we are overweight in the palm oil sector; as a result of the partly destroyed soy bean crops in the US, an increase in palm oil prices is to be expected as palm oil is a good substitute for soy oil. Palm oil producers in South East Asia should benefit from increased crude palm oil prices.

Robert van den Barselaar, Analyst Consumer Staples in the Global Equity team:
In contrast with the previous drought from 2006 to 2008, most company management teams are prepared for continued high and volatile commodity costs. Also, given the current economic backdrop, management does not see commodity cost inflation as an opportunity to increase consumer prices. Rather, they consider it a driver for optimizing their offering to the consumer. They want to make sure the consumer will stay with the company or brand by adjusting pack sizes, changing formulation and advertising the product’s benefits.

The overall inflationary pressure is less than over the 2006-2008 period. Currently, wheat and corn are setting higher prices, mainly as a result of the US drought. In 2008, almost all commodities made new highs, whether it was oil, corn or gold. With less of a synchronized commodity boom, companies are better equipped to whether this storm.

I would expect consumer prices to go up by roughly 5% as a result of significantly higher input costs. This would keep margins roughly at the same levels. For most branded food manufacturers, such as Nestlé and Unilever, commodity costs make up only 40% of sales. Therefore, if all commodity costs would go up by 10%, a 4% price increase would be required to offset the input inflation.

In the Global Equity portfolios we focus on companies that provide more added value. One of the biggest positions in the fund is Nestlé. Nestlé has many opportunities to manage input cost volatility. Also, the strength of the Nestlé brands allows them to increase prices if they want to.

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