Food Inflation - Think Grains
Teucrium | October 11, 2021
Jake Hanley, Managing Director/ Portfolio Manager
October 4, 2021
Global food prices have risen nearly 33% in the last year.[1] While food inflation threatens to negatively impact the global economy, informed investors could potentially benefit from a trend of rising prices.
Chart #1
UN Food and Agriculture Index. Source: Bloomberg Finance L.P. Generated on 10/04/2021. This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.
Trending or “Transitory?”
Unquestionably, the global pandemic and policy responses have created massive market dislocations. As global economies are “re-opening” prices are rising across many market segments. The question is whether the recent rise in inflation is transitory (i.e., a short-lived phenomenon),or the beginning of an extended period of higher prices.
We do not believe higher food prices will prove to be transitory. In fact, global food prices have been trending higher since 2016 and reached 5-year highs right before the onset of the pandemic. Prices are now near 10-year highs (see chart #2 below).
Chart #2
UN Food and Agriculture Index. Source: Bloomberg Finance L.P. Generated on 10/04/2021. This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.
While we believe it is unlikely that food prices will continue to advance at an annual rate of 33%, it may be premature to suggest that elevated food prices are a short-term, or transitory phenomenon.
Recent history provides a clue that food prices may remain elevated for a longer period of time. For example, you can see on chart #3 that there was a significant jump in prices over the second half of 2010. Prices eventually peeked in 2011 before heading lower. However, even as prices trended lower, they remained elevated and above the Q1 2010 high all the way through 2014!
Chart #3
UN Food and Agriculture Index. Source: Bloomberg Finance L.P. Generated on 10/04/2021. This chart is for illustrative purposes only and not indicative of any investment. Past performance does not guarantee future results.
While history does not guarantee future results, there is little evidence to suggest that food prices will buck the trend and prove transitory. Rather, we believe that the opposite is true and that relatively elevated food prices are likely to stick around for another year or more.
Investment Theme: Food Inflation
Global food inflation is largely drive by US grain prices. The correlations[2] between global food prices and grains are highest among all US exchange-traded food commodities (chart #4). Additionally, there is a causal relationship whereby rising global food prices can largely be explained by rising grain prices.[3]
Chart #4
This is for illustrative purposes only and not indicative of any investment.
Analysis and corresponding graphics were prepared by Teucrium Trading, LLC, using Bloomberg Financial L.P., October 2, 2021 Note: Commodities values are from futures (generic first) spot continuation charts. See Appendices for more details on Commodities used in this comparison. UN World Food Price Index taken from Bloomberg: FAOFOODI Index – An investment cannot be made directly in an index.
This is not surprising given that soybeans, corn, and wheat are vital components in the global food chain. For example, corn’s primary use worldwide is to feed animals. The same is true of soybeans. Corn and soybeans therefore are necessary “inputs” for cattle and hog production. Higher feed costs are often passed on to consumers.
Additionally, corn is used for starch and corn syrup, and soybeans are used for cooking oil. All these byproducts are important ingredients found in many of the packaged foods at your local grocery store.
Wheat, on the other hand, is primarily grown for direct human consumption. However, wheat can also be used for animal feed. Recently corn and soybeans have become more expensive relative to wheat. In response, some limited areas increased wheat feeding in limited amounts where economics and availability allowed.
Food Inflation: There are ETFs for That
Investors seeking exposure to food prices may consider our agricultural ETFs CORN (the Teucrium Corn Fund), WEAT (the Teucrium Wheat Fund), and SOYB (the Teucrium Soybean Fund).[4] Our single-commodity ETFs can be traded or held as part of a diversified portfolio. Please note that options are available on CORN, WEAT, and SOYB. Please speak with your financial advisor or broker to learn more.
[1] Based on The FAO Food Price Index (FFPI) which is a measure of the monthly change in international prices of a basket of food commodities. To learn more visit: http://www.fao.org/worldfoodsituation/foodpricesindex/en/
[2] Correlation: A measure of how two securities move in the market in relation to one another, i.e.; in tandem or inversely. Correlation is represented by the correlation coefficient, which ranges between -1 and +1. A positive correlation coefficient of +1 implies that as one security moves, either up or down, the other security will move in the same direction. A negative correlation coefficient of -1 implies that if one security moves in one direction the other security moves in the opposite direction. A correlation of 0 means that the movements of the securities are not correlated.
[3] For the period Q1 1990 – Q3 2021 The R-Squared value between the UN World Food Price Index and the GSCI Grains index is 0.90. In statistics R-Squared is the portion of the variance of the dependent variable (World Food Prices) that can be explained by changes in the independent variable (US grain prices).
[4] Our funds hold futures contracts traded on the CME. You can purchase our ETFs through your brokerage account (learn how to invest here). Please note that each fund is designed to track its respective proprietary benchmarks. Neither CORN, WEAT, nor SOYB own the front month (or spot) futures contract, but rather are diversified across the futures curve and own three different contracts with various expirations in accordance with the benchmark. Spot: The futures contract month nearest expiration and delivery month for futures contracts.