El Nino can reverse fall in food prices, says Nomura report

According to a new report by Japanese bank Nomura, agricultural productivity growth has been less impressive than in earlier decades. The reasons include labour issues, such as a rapidly ageing population in agricultural economies, and young people l
According to a new report by Japanese bank Nomura, agricultural productivity growth has been less impressive than in earlier decades. The reasons include labour issues, such as a rapidly ageing population in agricultural economies, and young people leaving farming jobs in search of higher-paying work.PHOTO: REUTERS

Concerns over a weakening Chinese economy and waning demand for goods has led to a sharp fall in the prices of food commodities such as corn, soya beans, wheat, cocoa and sugar.

However, bad weather could easily flip things around and cause a surge in food prices, Japanese bank Nomura has said in a new report.

Some meteorological experts believe that the current El Nino weather phenomenon could be among the strongest in decades, unleashing droughts in Australia and South Asia, mass flooding in South America and heavy rains in western North America. And "it may not take much disruption in global food supply to trigger another price surge which, as in 2007 to 2008, could be compounded by feedback loops such as increased hoarding, financial speculation and trade protectionism", the report said.

Also, long-term, underlying supply and demand forces could drive food prices higher over the next decade, it adds.

Demand for food is sensitive to increases in income, especially in low-income countries, where additional money would go towards buying more food.

"In rich countries, food demand is dictated more by population growth than income growth, since well-off (and well-fed) consumers spend extra discretionary income on durable goods and services (including weight-loss programmes) rather than food."

In Asia alone, excluding Japan, Nomura estimates there are about 2.2 billion people - about 73 per cent of the region's population - belonging to the low-income group whose demand for food would increase if their incomes rose, too.

"Furthermore, the world's most populous country - China - is in the process of rebalancing its economy away from investment and towards consumption, which should strengthen household demand for food," Nomura noted.

Meanwhile, food supply is not keeping up. In the past 20 years, agricultural productivity growth has been less impressive than in earlier decades, due to insufficient new investment in agricultural development in large emerging economies, Nomura said.

Labour supply in agriculture is also a problem, given a rapidly ageing population in agricultural economies. Young people, too, are leaving farming jobs to migrate to cities in search of higher-paying jobs.

For the stock investor looking to capitalise on an eventual surge in food prices, companies involved in the supply of raw food materials would make for good investments, Nomura said. These would include Singapore-listed First Resources, India-based Mahindra & Mahindra and Japan's Sumitomo.

Food inflation "losers" would be food packaging and processing companies, who lack the pricing power or business model to pass on higher farm prices quickly to customers. These include giants Nestle and Unilever.

A version of this article appeared in the print edition of The Straits Times on August 29, 2015, with the headline 'El Nino can reverse fall in food prices, says Nomura report'. Print Edition | Subscribe