First published in Investment Week June 2023
It is always interesting to follow public reaction to what is happening in the economy. Years, if not decades, can go by with most people paying little attention to the latest releases. Then suddenly, a shift in the data forces an issue not just into the newspaper headlines, but also to the forefront of people’s daily lives.
This is exactly what has happened with inflation. For much of the 2010s, UK inflation tracked close to the Bank of England’s target, keeping the data releases largely buried within the confines of the business pages. Yet today, with surging price pressures putting significant strain on households across the country, inflation is a topic on everyone’s minds.
Food prices are one of the most visible examples. UK food inflation has been running above 10% year over year since the middle of 2022, a situation that is particularly challenging for those lower down the income spectrum where basic essentials have a much larger weight in overall spending. As a result, the UK government is increasingly under pressure to react, and is even reported to have been engaging in discussions with retailers over voluntary price caps on basic items.
Debating the drivers
Discussions around the drivers behind surging food prices in the UK currently tend to follow one of two separate threads. For some commentators, Russia’s invasion of Ukraine is the key factor given both countries’ historical importance in the supply chains of cooking oils, wheat, fertiliser and other agricultural essentials. For others, the problems are closer to home, with many column inches dedicated to the impact of new trade barriers between the UK and the European Union.
There are good reasons to believe that both of these factors are partly to blame. To the former point, UK food prices followed global food prices sharply higher in 2022, and many eurozone countries are experiencing similar problems given a shared reliance on imports from Eastern Europe. To the latter, recent analysis from the London School of Economics has evidenced that food products with high reliance on EU imports have seen relatively larger price increases since January last year. Border checks on goods arriving from Europe threatened to put more sand in the wheels later this year, but these have now been delayed for a fifth time.
From a more macro perspective, monetary policy is not the right tool to effectively tackle surging food prices. When inflation spikes, the central bank’s role is generally to raise interest rates in order to reduce demand. Some may argue that the Bank of England could have acted with greater foresight to ward off last year’s inflation spike. But for basic essentials like food, clearly it is a supply response, not demand, that is required.
While debate around the source of today’s problems will continue for some time, there is a much larger challenge to future food security lurking in the background: the threats posed by climate change. If policymakers dedicate their focus to mitigating the short-term impact of disrupted supply chains, they risk failing to address the much larger elephant in the room.
For many parts of the emerging world, warmer temperatures have already been causing immense problems for many years. In 2022, the Intergovernmental Panel on Climate Change published a sobering report that estimated that half the world’s population faces water scarcity for at least one month every year.
It would be wrong for Western governments to view these challenges as a distant issue, both in terms of geography and also time scale. Increasingly frequent droughts are already creating major problems for farmers in developed economies, and with OECD estimates suggesting that climate change could reduce average yields of rice, wheat and maize by 6-10% globally over the coming decades, urgent action is required. Shifting demographics will create additional pressures: with the world’s population expected to increase by nearly 2 billion people in the next 30 years, there will be many more mouths to feed.
Against this backdrop, how should investors respond? The better news is that there is already a wide range of innovative, and investable, companies that are looking to tackle this essential issue. Solutions will manifest in a variety of ways. Plant-based proteins that look to make food systems less carbon intensive; vertical farming that reduces the amount of land dedicated to agriculture; or AI-driven precision agriculture that aims to maximise crop efficiency while reducing the use of fertilisers, to name but a few options. With 6% of global greenhouse gas emissions attributable to food waste, improved packaging, refrigeration and food transportation must be another area of focus. All of these, along with many more innovations, will be required to strengthen food security, and dampen food price volatility going forward.
Amid a cost-of-living crisis, policymakers have found themselves in “reactive mode”. But a short-term solution cannot come at the expense of longer-term strategy. Investors would be wise to keep a similar perspective. Good investment decisions, just like good economic policy, are derived from great foresight, not hindsight. Now is the time to seek out opportunities in companies that can solve for issues of scarcity such as food, which are only likely to increase over the coming years.