Bill Witherell is Cumberland’s Chief Global Economist.
The global food crisis of 2007-2008 is threatening to repeat in the coming months, as the worst drought in 50 years devastates the US corn crop, with 51% of the crop rated “Poor/very poor” by the US Department of Agriculture. This crop is said to be on a par with that of 1988 crop, the worst in the past thirty years. Note that the US is the top producer and exporter of corn. Our account for nearly half of the world’s corn and also a third of the world’s soybeans, the harvest for which will be the lowest in five years. The director-general of the UN’s Food and Agriculture Organization, José Graziano da Silva, characterizes the present global food situation as “precarious,” as do experts we have contacted.
The food crisis in 2008 led to riots in some 30, mainly very poor, countries and immeasurable hardships in many more. Following that crisis, governments vowed to act to improve global food security, including at a G8 Summit in Italy in 2009. The followup is reported to have been a mixture of some gains and some disappointments. Among the gains are the provision of improved strains of some crops and increased agricultural aid. There have been disappointments in the areas of humanitarian food aid and a failure to agree on binding agreements to regulate food export bans. The 2008 crisis was made more severe by export restrictions by some important agricultural producers, including Russia and the Ukraine.
The threat of a new crisis has led the governments of the twenty leading countries that make up the Group of 20 (the G20) to hold a conference call in the week of August 27, to arrange a meeting to discuss ways to avoid policies that would worsen the situation, such as export restrictions and hoarding. This would be the first meeting of the recently created Rapid Response Forum, which has the mandate to “promote early discussion among decision-level officials about abnormal international market conditions.”
One issue that is sure to be raised by the UN is biofuel policies and the government-mandated biofuel production targets of the US and European Union. The US is projected to divert about 40% of its corn crop into ethanol, and about 60% of Europe’s rapeseed crop goes to the production of biodiesel. Brazilian ethanol production consumes half of their sugarcane crop. This is a politically divisive issue, and we do not anticipate the G20 will be able to reach agreement on the UN’s call for an immediate suspension of biofuel production mandates.
There are several factors that are more positive in the current situation, as compared with 2007-8. The demand pressure from China and India is less than it was five years ago. Stocks of rice are high and rice prices have been fairly stable, although Thailand’s policy of stockpiling rice and thereby reducing exports is worrying. Wheat stocks are also said to be high, but Russia’s wheat production has been hurt by a drought. Production of African crops such as cassava has increased significantly. And the global economic slowdown has had a moderating effect on the demand for food.
On balance, as investment managers, we see the sharp increases in global food prices that have already begun and the potential for a global food crisis as a serious economic and geopolitical risk that capital markets appear to be underestimating. It is yet another reason Cumberland Advisors has moved to more defensive positions in our equity portfolios, maintaining cash positions in our US and International Portfolios and a higher than usual fixed-income position in our Global Multi-Asset Class Portfolios.
Countries that have felt able to move to significantly eased monetary policies to encourage growth, including many emerging markets, may soon be under pressure to reverse course as higher food prices increase the risk of more general inflation. Higher food prices will hurt consumer demand in all countries, particularly those where food accounts for a high share of total consumer spending. On the other hand, the equity markets of food-exporting countries such as Australia, Canada, and Brazil would be expected to benefit from the higher agricultural prices.