Strategies and stocks for rising food prices
- A massive commodity super cycle is underway that could rival that of the early 2000s.
- This is causing food prices to skyrocket, leading to a 20% rise in global food inflation.
- Hedge fund manager Kevin Smith explains the strategies and actions investors can take as food prices rise.
According to Kevin Smith, Founder and Chief Investment Officer of macro hedge fund Crescat.
The last supercycle, driven by China’s great boom period, saw major upside moves for copper and iron ore, both of which jumped more than 400% between 2000 and 2011.
This time around, the supercycle pattern is closer to that of the 1970s, where it will be driven by supply shortages rather than a demand boom.
“It’s going to be a lot more like the 1970s when we had things like the Arab oil embargo and the price of oil tripled,” Smith said. “At the same time, the S&P fell 50% and shares of Nifty Fifty fell 70% and more. The Coca-Colas, Procter and Gamble and IBM of the world.”
The Nifty Fifty were a group of outperforming U.S. growth stocks that enjoyed high valuations in the 1960s and early 1970s. When the trio of high inflation, rising interest rates and soaring oil prices entered effective, the high-flying stock group fell.
This time around, even with the temporary halt of 2020, most commodities have soared. Lithium has gained 400% over the past three years, while natural gas and wood have gained 200%. Nickel, aluminum, crude oil, diesel, copper, silver and coal all posted double-digit percentage gains during this period.
Smith sees parallels with today’s environment. For months, he has been monitoring and warning about the excesses of the American stock market, in particular on the shares of software companies.
Instead of betting on the continued outperformance of mega-cap stocks, Smith braced for “the big spin.” The idea that investors will shift from overvalued, long-lived financial assets, such as mega-cap tech stocks, to undervalued sectors of the market that have tangible use cases in today’s economy today.
the The US stock market suffered a sharp correction at the beginning of this year, when
became hawkish and signaled that it would raise rates multiple times this year.
This impacts the discount rate, which is used to price stocks, and many tech stocks are very sensitive to this.
A supply shock
Raising interest rates will help reduce some of the excesses in the market and consumer demand, Smith said. But that won’t lessen the supply shock that’s underway as society tries to transition to a greener, more sustainable future.
The demand for sustainable products is increasing, whether electric vehicles or solar panels, as is the consumption of the materials that make them up, such as copper, lithium or aluminium.
But building that infrastructure will consume more of those natural resources, many of which have faced a decade of underinvestment precisely because of concerns about their impact on the environment. Crude oil and natural gas are probably the most striking examples.
“There’s going to be a shocking power shortage,” Smith said. “How will farmers be able to afford to buy fertilizer to plant crops, as prices for natural gas rise, which is a key input for fertilizer?”
“If they can’t afford to buy fertilizer, they won’t plant their crops and the prices of agricultural products will skyrocket, I think all that happens,” he added.
This shift in momentum is what triggers the start of a commodity supercycle that is not expected to subside anytime soon.
“We’re seeing a rush into overvalued, bubble-induced investments in growth stocks and fixed incomes…and a rush into real, durable assets, tangible assets,” Smith said.
“That’s the big spin, that’s what we all still see coming,” he added.
The bull is raging
It’s not just Smith who sees a commodity super cycle in the making.
JC Parets, market technician and founder of AllStarCharts.com, is bullish on commodities, based on technicals alone.
“And what we know about these things is that they don’t last a few months or a few years,” Parets recently said on a podcast. “They last a decade.”
Already this year, the The S&P GSCI Commodities Index returned 14%, after an already impressive gain of 40% last year.
But Fidelity’s global head of macroeconomics, Jurrien Timmer, doesn’t see the commodity bull run slowing down any time soon, either.
“I think the raw materials, both technically and structurally, are in a
and will provide good diversification, especially against the bond portion of a portfolio in this negative real rate environment,” Timmer said in an interview with Insider.
Exorbitant food prices
One of the main areas where the impact of the commodity supercycle will be seen is in food prices.
Global food inflation is already up 20% year-over-yearaccording to a recent note from Bank of America Chief Investment Strategist Micheal Hartnett.
Smith highlights a number of ways investors can take advantage of soaring prices.
1) Stocks of fertilizers
“They are spreaders of higher energy prices, and they are able to pass those prices on to farmers,” Smith said.
2) Future markets
Investors can gain direct exposure to agricultural commodities through the futures market. Wheat, corn, soybeans, as well as cattle, pork and even orange juice futures are available.
3) Commodity ETFs
An example is the Invesco DBA Commodities ETFwhich is an equally weighted agricultural ETF, Smith said.
He carries a lot of grain in the wallet, he added.