Buy food – price rises are almost guaranteed

By Garry White
Published: 7:50PM GMT 25 Oct 2009

There are two main drivers of commodity prices – supply and demand. This is just as true with soft commodities such as wheat, rice, sugar and cocoa as it is with copper and tin. The big problem for your weekly shopping budget in the future is that there are problems on both sides of the equation that are likely to squeeze prices higher, permanently.

However, this also provides a great investment opportunity and now is a good time to buy into many areas of food production and distribution.

In September, sugar prices hit a 28-year high after the failure of crops in India due to the poor monsoon season. Prices have fallen about 20pc since then, but are still likely to charge ahead over the longer term.

Cocoa prices are also close to a 30-year high after a mixed harvest in Ivory Coast. Production of the bean is expected to be 100,000 metric tonnes lower this year than the 1.22m tonnes produced in the country last year.

Weather is partly to blame for the cocoa problem – the other issue is the age of the trees. Older cocoa trees yield less cocoa.

These multi-decade highs in food staple prices have been caused by constraints in the supply side of the equation. However, it is the demand side of the equation that provides compelling evidence that prices are trending upwards.

In a recent report called The End of Cheap Food, analysts and economists from Standard Chartered have calculated that food production would need to rise by a staggering 70pc by 2050 if the world’s population is to remain adequately fed.

The emerging market-focused bank argues that water will become scarcer and restricted availability of arable land will increase imbalances in food production, while rising biofuels production will deny an increasing amount of grain output for human consumption.

Whilst food production will continue to rise, the gap between increasing demand and slowing supply will ensure food prices will rise – and stay high, it says.

Of course, predictions of imminent food catastrophes are nothing new. In 1798, Thomas Malthus published An Essay on the Principle of Population. In it he argued that the world population would continue to grow, but that land itself was finite. He predicted a nasty cycle of starvation, societal breakdown and mass death and the concept of the Malthusian catastrophe was born.

But Malthus was wrong – so far.

The Industrial Revolution brought more efficiency to food production and the use of machinery increased crop yields. Then in the 1940s and 1950s there was the so-called “green revolutionâ€