By Harrison Schwartz
- Food inflation is now 20% in China and approaching 15% in India, likely accelerating the economic slowdown across Asia.
- While prices initially rose due to ASF and heavy rain in India, food inflation seems to be spreading to all agricultural items in Asia and Africa.
- This will likely offset the negative export impact of the U.S dollar and cause American food exports to rise considerably in 2020.
- I expect this rise in exports to benefit large agricultural funds like the Invesco ETF DBA.
- DBA seeks to reduce the negative futures impact of contango, making it a solid way to passively bet on higher general food prices.
As you have likely heard, inflation can be broken into two groups: supply-side inflation that stems from physical production constraints and demand-side inflation that depends on interest rate policy and monetary liquidity (i.e artificial constraints).
Most investors focus primarily on demand-side inflation as seen by the popularity of “Fed Watching.” While this is valid, investors may be missing a major emerging trend in the global emerging economy: skyrocketing food inflation. Food inflation is perhaps one of the most important risk indicators in the economy.
Food inflation precipitated the Arab Spring, the French Revolution, countless anti-government riots in sub-Saharan Africa in 2007 and 2008, and various revolutions in the 1970s. Food has been extremely cheap by historical standards following the 2012 crisis, but water issues in India (too much rain for harvests but too little groundwater) and a mass-death of pigs (currently estimated to be 25%+ of the global total) may have begun to turn the tide.
Take a look at core CPI (excludes food) adjusted U.S food and energy prices since 2000:
Data by YCharts
As you can see, prices rose dramatically during the first decade and fell dramatically during the current decade. There is also a very direct connection between the real food price index and the energy price index. This is likely due to the fact that producing food requires energy-intensive capital and producing energy requires food-intensive labor (considering most global energy comes from developing areas where workers spend a large portion of their income on food).