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Blogs

Disruptions in agriculture and food production may create opportunities for investors

Sid Queler

September 22, 2022

This article is the first in a three-part series discussing potential opportunities in commodities.



This blog is the first article in a three-part series discussing potential opportunities in commodities. In April 2021, I explained that commodities are a triple threat. They can help investors manage inflation risk, while deepening portfolio diversification and improving return potential. In February 2022, when Russia invaded Ukraine and sanctions were imposed on Russia, commodity prices – especially energy and food – shot higher. The Bloomberg Commodity Spot Index, which follows almost two dozen commodities, reached a record high in June. Since then, the Index has fallen.Regardless, we believe commodities continue to be an attractive asset class, and we will explain our reasoning in a three-part series discussing potential opportunities in commodities. The articles will examine:

  • The shorter-term effects of the war in Ukraine on food and agricultural commodities.
  • The shorter-term effects of the war on energy commodities.
  • Longer-term opportunities in commodities, overall, focusing on population growth, economic development, and the move to clean energy.

I hope you find the information valuable.

I have a college friend who grew up on a farm. She likes to regale her children with tales of farm living, including one in which she chased and captured a squawking chicken before wringing its neck so her family could enjoy a delicious roast chicken dinner on Sunday. Some of her children are entertained by this story; others are not. They appreciate the food on their plates but prefer not to think about how it got there.

Getting food to people is a complex process, and the war in Ukraine has proven to be one of the most disruptive events for food and agriculture in decades. The United States, China, India, and Brazil lead the world in food production and export; however, Russia and Ukraine play important roles. Before the war began:

  • Ukraine and Russia accounted for more than 70% of sunflower oil exports.2

  • Russia and Ukraine were responsible for almost one-third of global wheat and barley exports.3

  • Russia was the second largest fertilizer supplier, globally.4

Russia’s invasion of Ukraine, in tandem with world sanctions on Russia, exacerbated an already difficult situation. Before the war, global food supplies were low and global food prices were high because of poor weather, drought, rising transportation costs, supply chain issues, and export restrictions in some countries. The war further limited supplies and pushed prices even higher.

The ongoing conflict has limited Ukrainian farmers’ ability to harvest, plant, and store grains. The war has and continues to damage crops, livestock, machinery, equipment, storage and shipping facilities and other agriculture infrastructure.5 Approximately, 20% to 30% of Ukraine’s winter grain crops are likely to go unharvested, and farmers have planted fewer spring crops.6 One potential consequence of smaller harvests and reduced sales is that Ukrainian farmers may be less able to fund future operations when the war ends.

Overall, in 2022 and 2023, the world is likely to have lower supplies of food and fertilizer while paying higher prices for both. There are concerns that shortages of wheat and cereal grains will increase demand for other food staples, like rice, pushing those prices higher.

While global food prices remain near historic highs, they moved lower this summer. The shift likely occurred because:

  • An agreement allowed Ukraine to begin exporting again. (Restrictions on Russian exports may be eased, as well.)
  • Spring wheat crops in the United States may be larger than usual, easing shortages and prices.7
  • Investors took profits and restructured portfolios to anticipation of global recession.

Despite the price decline, global food supplies are likely to remain constrained because the issues that pushed prices higher before the war remain unchanged.

Investing in agricultural commodities at relatively attractive prices may still make sense. Some possible investment opportunities include companies that offer:

  • Traditional agricultural products and services such as fertilizers, seeds, livestock and processing,
  • Solutions with the potential to increase food production while using less land and water, or
  • Innovations with the potential to change food production, such as vertical farming, alternative proteins, smart irrigation, or desalination.

If you would like to talk about how to position your portfolio as you pursue your financial goals in the current economic environment, please contact me at Sid.Queler@cibc.com or 617-531.6954.

 

Sid Queler is the chief growth officer, with more than 30 years of industry experience. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also shares economic and financial insights in his biweekly  column, The Affluent Mind.

Bloomberg Commodity Spot Index Price Data. MarketWatch. Cited September 2, 2022.
2Which countries export ?’. The Observatory of Economic Complexity. Cited September 2, 2022.
3 Alexandra Propenko. ‘What’s in the Ukraine Grain Deal for Russia?. Carnegie Endowment for International Peace. July 26, 2022. Cited September 2, 2022.
4 ‘Impacts and repercussions of price increases on the global fertilizer market.’ Foreign Agricultural Service, U.S. Department of Agriculture. June 2022. Page 4. Cited September 1, 2022.
5Áine Quinn. ‘Ukraine’s Farm Industry Has Lost $4.3 Billion From War Damage.’ June 14, 2022. Cited September 1, 2022.
6 Note on the impact of the war on food security in Ukraine.’ Food and Agriculture Organization of the United Nations. July 20, 2022. Page iv. Cited September 1, 2022.
FAO Food Price Index. World Food Situation. Food and Agriculture Organization of the United Nations. Cited September 1, 2022.