A Gastronomic United Nations in Your Fridge and Pantry

Why higher food prices are on the way... You can find a job on a farm... A fragile global supply chain... A gastronomic United Nations in your fridge and pantry... How to hedge a higher grocery bill... Watch a replay of Steve's real estate event...

Lagoons full of fresh milk... smashed chicken eggs... buried onions...

During the height of the coronavirus lockdown, farmers around the world literally couldn't give away their products.

Shuttered restaurants, cafés, and cafeterias – where around 30% of food in the world is consumed – weren't buying anything. And export demand had vanished.

Farmers were throwing away milk and eggs... Baby pigs were euthanized... Cabbage and tomato crops were plowed over... and potatoes were very, very cheap.

It got so bad that in Belgium – the world's largest exporter of frozen potato products, where they take their frites with mayonnaise very seriously – you could buy around 500 pounds of potatoes for the price of a gallon of gas.

Since the beginning of the year, the S&P GSCI Agriculture Index, a broad index of agriculture prices, is down roughly 13%. Livestock prices are down 30%... and the price of coffee has fallen nearly as much.

So far, lower food prices have been part of the post-COVID-19 'new normal'...

Hundreds of millions of newly unemployed people are spending less. And demand from the crippled restaurant industry – from multiple Michelin star-rated restaurants in New York City to the chicken-and-rice stalls where I (Kim Iskyan) live here in Singapore – has been decimated.

Social-distancing requirements have hit margins... as people eat at home instead.

You might think that lower food prices are one of the few upsides to a global pandemic. After all, most people wouldn't mind spending less at their local Kroger (KR).

But falling prices for the economy as a whole spells trouble...

In the Digest over the past few months, we've talked a lot about potential inflation in assets tied to the U.S. dollar... and why owning "hard" assets, like gold or real estate, makes sense in times like these.

But with demand around the world for many goods and services wiped out by efforts to contain the COVID-19 outbreak, fears of deflation – persistent cheaper prices – are a concern, too.

You see, deflation motivates consumers to buy later...

If you could buy that new fridge or car now, or wait six months – knowing that it will be cheaper – what would you do? Buying later at lower prices means that total spending falls.

Companies react to this by producing less – which means they need fewer workers, and that they can pay them less. Put it all together, and deflation is the economic equivalent of cancer.

So... food prices have been falling. But the good thing (not for your pocketbook today, but for the global economy) is that contrary to what a lot of economists and investors are thinking now, that's going to change.

In the coming months, prices of agricultural products – from meat to bread to berries – will rise. In today's Digest, I'll explain why... and detail how, as investors, we can profit from this trend.

Even if you can find a job at a farm, it's hard to get there...

The first factor of higher food prices is that there aren't enough qualified farm workers in the right place at the right time.

The International Labor Organization forecasts that worldwide, around 305 million people (nearly the entire population of the U.S.) have lost their jobs this year. So you might think that in the midst of a global economic depression, plenty of folks would be interested in picking berries.

But in many countries, coronavirus travel restrictions are preventing seasonal workers from "following the crop." As the Financial Times explained...

The U.K.'s fruit and vegetable growers are facing a steep increase in costs and struggling to retain hastily recruited local pickers after the coronavirus lockdown prevented the arrival of the usual seasonal workforce from eastern Europe.

In the U.S., some of the 2.7 million farm workers – about half of whom are undocumented immigrants, many from Mexico, according to the U.S. Department of Agriculture – can't get into the country to work the crops.

But workers who make it to the fields have bigger worries, like getting sick and spreading the illness while working and living in close quarters in the peak of the summer produce season.

In recent months, farmers in parts of China have also struggled with labor shortages in the wake of pandemic-related lockdowns. And earlier this week, the Mexican government said it would stop migrant workers from going to Canada to work the harvest amid a coronavirus outbreak on farms there.

Many crops, particularly types of fruits and vegetables, are labor-intensive – picked and packed by hand – in part because existing technology can't handle soft and easily damaged goods.

Farmers have tried hiring locally – remember all those newly unemployed people? But few former cubicle dwellers or college students who didn't land that Wall Street summer internship want to head to the fields. Those who do are slow and inefficient (and thus, expensive) compared to more experienced workers.

The problem is, berries and cabbages don't wait for pandemics to pass or workers to leave lockdown. Nature doesn't let farmers restart a production line when it's convenient.

The question is... how will higher labor costs and lower production be reflected in prices? Beyond that, will these changes be cyclical (just a blip on the screen) or structural (resulting in permanently higher prices in the post-pandemic "new normal")?

And farming is just one link in the global food supply chain...

Even if your sense of culinary adventure ends at meatloaf and mac and cheese, you probably still have a gastronomic United Nations in your fridge and pantry.

Globalization – which is the movement of goods between countries – means that the world is, literally, on your plate... from salt (world's biggest producer is China) to coffee (Brazil) to pasta (Italy) to lemons (Mexico) to rice (India).

Even when we try to "buy local," a lot of what we consume had to travel thousands of miles to make it to our plate.

Over the past 30 years, food exports have grown six times – and 80% of the world's population consumes food that's at least in part produced in another country. As the Economist wrote...

Food, like cars, is often assembled close to the consumer from parts sourced anywhere but. Ukrainian wheat, milled into flour in Turkey, may be turned into noodles in China.

The pandemic has exposed the vast, finely calibrated global food supply chain to be as delicate as an overripe Chilean blackberry.

When truck drivers in Brazil fall ill, middlemen vendors in India are locked down, farmers in Idaho can't buy seeds, or trouble strikes any other link of the long sequence of events that results in your forkful of food... the chain breaks.

That's partly reflected in shortages – such as for meat in parts of the U.S., after meat-packaging plants were shuttered when employees came down with the coronavirus.

And Economics 101 tells us that (absent external intervention) whenever there isn't enough of something, the price of it goes up.

In many parts of the world, the heaviest pandemic-induced stress on food supply chains has passed. (Here in Singapore, we've recently experienced shortages of chocolate chips and Heinz ketchup... admittedly, very much "first-world problems.")

But a number of big food producers – like Brazil and Russia – haven't begun to flatten the coronavirus curve.

In some parts of the world, broken food supply chains mean hunger...

According to the U.N.'s World Food Program, the number of people at risk of going hungry by the end of 2020 has doubled since last year – to 265 million people.

The pandemic – and how the world's governments reacted to it – has highlighted the brittleness of the global food system...

Altogether, it accounts for 10% of world economic output and employs around 1.5 billion people.

Developing greater resilience in food supply chains and creating redundancies – that is, duplicating links in the system – to safeguard against future problems, whatever the cause, won't be quick, easy... or cheap.

In many cases, things just get worse when governments get involved...

Some countries are intentionally breaking links in the chain.

A few months ago, Russia and Kazakhstan – two of the world's biggest wheat exporters – imposed caps on wheat exports. (Egypt, one of the world's biggest importers of wheat, banned exports of locally produced legumes.)

Vietnam, one of a handful of countries that produces more rice than it consumes, temporarily prohibited rice exports. Governments wanted to be sure to have enough food for their own people, before selling it to foreigners.

This "every man for himself" approach to food security might be smart politics – hungry citizens aren't happy voters. But it's inefficient... and it's wrecking the global food supply chain.

The problem with food 'self-sufficiency'...

Recently, French President Emmanuel Macron called on Europe to develop "strategic autonomy" in agriculture.

"Buy local" is a nice rallying cry for local farmers and restaurateurs looking to support the community, but it's lousy for the long-term viability of agriculture. And it can only lead to higher prices.

On another front, tariffs are the peanut butter on the roof of the mouth of the global food trade. Last month, we wrote about the dangers to the global economy of a renewed U.S.-China trade (and financial) war.

Today's global macroeconomic environment – featuring exploding unemployment and imploding economies – has a lot in common with that of the Great Depression, when the U.S. government increased tariffs to try to protect American industry.

In turn, other countries put up their own tariff walls. This tit-for-tat unquestionably made the Great Depression far longer and deeper than it would have been otherwise.

Agriculture has long been a weapon in the trade war and tariff arsenal. The U.S., for example, has imposed tariffs on cheese. Soybeans, a major Chinese import, are a frequent topic of discussion in U.S.-China trade negotiations.

The intersection of agriculture and coronavirus concerns is a dangerous one...

Last weekend, China suspended poultry imports from a Tyson Foods (TSN) plant in the U.S. where employees tested positive for COVID-19. (A few days before, an outbreak in Beijing was blamed on imported salmon.) Though no evidence shows that the coronavirus can be contracted from food, China said it's just being extra careful.

What happens if other countries adopt a similar "better safe than sorry" approach to agricultural products from coronavirus-hit markets, factories, or fields? The pandemic will continue to disturb food production and exports in ways we haven't even thought of yet.

From there, it's a short jump to countries imposing non-tariff trade barriers on specific products (or producers) under the guise of virus concerns... which can trigger far broader problems.

"Could [the Tyson poultry import suspension] dissolve the U.S.-China Phase One trade deal?" wondered Foreign Policy magazine on Monday. And when we're talking about higher tariffs – trade barriers – for food, not only will prices go up... it could also result in many millions more people going hungry.

Putting it all together... labor shortages and sick farmhands... the now-or-never nature of agricultural production... the "whole world on your plate" nature of how we eat... fractured supply chains... "food nationalism" and tariffs on food and agriculture...

It's all pointing to higher food prices, sooner rather than later.

On top of that, our collective appetite is growing...

Several projections show that over the next 30 years, the global food supply will need to increase by 50% to accommodate more people who are each consuming more.

We're going to be asking Mother Earth to do more... with less.

So what's the best way to hedge a higher grocery bill?

Stocking your pantry – buying sugar, coffee, and flour – wouldn't help much.

Food retailers like Kroger benefited from panic-buying during the pandemic. But in normal times, they're slow-growth companies... and they may struggle to pass on higher prices to consumers in coming months.

Another way of investing in higher agriculture prices is via exchange-traded funds ("ETFs") and similar types of funds that aim to track the price of an index of agricultural commodities – like the Invesco DB Agriculture Fund (DBA) or the Elements Rogers International Commodity Index-Agriculture Total Return Fund (RJA). Similar funds track the price of wheat, coffee, sugar, and other commodities.

But these funds can't buy silos full of wheat or farms of pigs. Instead, they invest in futures contracts on the commodities. (Futures contracts, which trade on exchanges, are agreements to purchase something at a predetermined time and price.)

The problem is... the cost of rolling over contracts (that is, buying a later month as the end of the current futures contract approaches) eats into returns over time.

Unless you're using these kinds of ETFs for short-term speculation (and even then, they probably won't work well), you're almost guaranteed to lose money holding them for more than a few months – regardless of the price movement of the underlying commodity.

For example, over the past year, the spot price of wheat is down around 1%... but the Teucrium Wheat Fund (WEAT) has fallen 14% over the same period.

A better way to invest in rising prices for food and agriculture is to buy shares of the companies that will drive increased efficiency of agricultural production...

VEGI, MOO, and SOIL...

Farmers can't do a lot about agricultural tariffs, workers falling ill, supply chain breakdowns, or other coronavirus challenges... but one thing they can try to improve is the efficiency of their assets.

That's good news for agricultural chemicals companies, seed producers, commodities processors, and fertilizer makers. All of these companies should see rising demand for their products.

A handful of ETFs deliver broad exposure to these sorts of companies... such as the iShares MSCI Global Agriculture Producers Fund (VEGI) and the larger VanEck Vectors Agribusiness Fund (MOO), as does a fertilizer-focused offering – the Global X Fertilizers/Potash Fund (SOIL).

Most of the companies in these funds are large and won't double overnight... but they'll have what I think is a long-term, big-picture macroeconomic wind at their backs.

And as an investor – especially in an environment that's even more full of uncertainty than usual – that's a good thing.

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A quiet mailbag today... What do you think about the potential for rising food prices? Are you seeing them already at your local grocery store? As always, send your notes to feedback@stansberryresearch.com.

And one last thing...

We hope you joined True Wealth editor Dr. Steve Sjuggerud for his webinar last night about the exciting investment opportunities in real estate today. But if you missed it, don't worry... A replay is now available right here.

We've never covered real estate in much depth in the 20-year history of Stansberry Research, but Steve and his team believe they've finally found the best way for subscribers to spot and make investments in this global $9 trillion market.

In his presentation, Steve revealed his top way to invest in real estate today... and a panel of experts, including Kendra Todd, the Season 3 winner of The Apprentice, and noted real estate investor Ronan McMahon, also shared their thoughts and analysis.

It's a fascinating discussion that you don't want to miss. So again, if you didn't tune in to last night's event, be sure to check out the FREE replay right here.

Regards,

Kim Iskyan
Singapore
June 25, 2020