Food could be the next investment bubble

Published on 8th June, 2008

Irish investors are jumping on the commodities bandwagon amid a food price crisis, reports John Reynolds 

WITH food prices spiralling out of control, leading to shortages and riots in some of the less well-developed nations, fingers have been pointed at the investment community.

It has been claimed that market speculators are helping to drive up the prices of core food products, such as rice, corn and livestock. Some of those speculators are Irish. 

The €20bn Irish National Pensions Reserve Fund is among the legions of investors that are making big money from the soaring commodities sector. It is not alone. Canada Life, Eagle Star and Irish Life are among those that have ploughed money into food commodities.

As a UN summit earlier this week called for reducing trade barriers, adding that the crisis threatens one billion people with hunger, Merrion Capital’s head of wealth management Shane Nolan pointed to an increased interest from Irish investors in food commodities and related investments.

“Since the start of the year we have focused on what can be a volatile sector. They can be traded as direct commodities, through related companies or through exchange traded funds (ETFs).

“At various times there’s been a surge in interest in specific grains such as wheat, corn and soya beans. There’s also been a growing interest in ETFs trading corn or wheat or a basket of food commodities.”

At an international level meanwhile, investors and hedge funds are betting hundreds of millions on a long-term boom in agriculture and food production, buying up anything from farmland to grain elevators, stores and ships, in what might be the next investment bubble.

Even Bob Geldof has got in on the act, advising a firm that aims to grow jatropha, a biofuel crop.

This week, Dublin investment firm Fearon Duggan Capital Partners further highlighted the increased appetite for food-related investments here when it launched a €10m bond product linked to the futures market for food commodities.

Nolan has also noticed speculation on K&S, a German potash maker (a fertiliser ingredient). Investors are betting that it, too, will benefit from a soaring demand for food — and therefore fertiliser — triggered by the crisis.

Regarded by many as a corporate giant trying to feed the world its ‘Frankenstein foods,’ agricultural biotech giant Monsanto hopes to profit from it. The firm sees a moneyspinner in developing new seeds for corn and soya beans. They will double yields by 2030, and the crop will require 30 per cent less water, land and energy, it claims.

There is no quick fix to the crisis, however. Eoin Fahy, senior economist with KBC Asset Management, argues that blaming speculators for driving up food prices ignores the bigger picture.

“The Commodities Futures Trading Commission in the US says there’s no evidence that speculators have driven up food prices. These commodities have been traded for years and it’s only very recently that it has drawn people’s attention.

“Although I can’t prove that financial markets aren’t pushing up food prices, if they are then it’s on a very small scale compared to other factors. For example, people in India and China are switching to more Western-style diets, using more grains and eating more meat, which is grain-intensive.

“You also have a huge increase in demand for food on one hand, and on the other there’s a constraint in supply, caused primarily by climate change. China is running out of water very fast, which is affecting crop yields. Australia, too, has experienced droughts.”

Furthermore, oil at $120 to $130 a barrel is pushing up the price of fertilisers, many of which are oil-based, further adding to the costs that a farmer growing wheat or corn is passing on.

Meanwhile, Irish banks don’t appear to be guilty of helping to fuel the food crisis by speculating on food on a huge scale. Bank of Ireland says its funds do not invest in food-related commodities. AIB maintains that its exposure to food commodities is likely to be indirect and a very small percentage of the €9.7bn it has under management. Irish Life, however — part of the Irish Life & Permanent Group — has life assurance investments amounting to about €32bn, and about €35m of this is invested in various food commodities.

“Some of this would be invested in commodity futures and some in equity commodities. These would include wheat, corn, sugar, cattle and hogs,” says investment manager Ciaran Bristow.

“From a strategic investment point of view, we see it as perfectly acceptable and sensible to have an exposure to commodities. We think it is a legitimate high-level asset class,” he argues.

“Wheat prices have been very volatile. It increased by 60 per cent earlier this year, but it has dropped. The trend is upwards, and food commodities are extraordinarily volatile because of speculators,” he claims.

The National Pension Reserve Fund has €40.7m of its huge €19.38bn fund invested in food commodities.

“It is a passive investment — in the S&P Goldman and Sachs Commodities Index, which includes wheat, corn and soya beans — for diversification purposes,” according to spokesman Adrian O’Donovan.

Several other funds here, notably Eagle Star’s €8m global commodities fund and Canada Life’s Quadrivium Fund, have also ploughed money into food-related commodities.

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