Two Plays to Capitalize on Global Food Demand

Freedom Financial Archive | Originally posted Feb 17, 2023
  • Food insecurity is threatening emerging markets and creating opportunities for food producers.
  • Global risks in 2023 include rising inflation, stagnant wages, and a food supply crisis.
  • Two recommended opportunities are major global entities with a large footprint in food processing and excelling in great economies of scale and sourcing.

Dear Reader,

In 2021, we talked a lot about how the polarization of the world was going to go into overdrive.

Income inequality has been expanding for decades, which has been a core driver of anger within nations. The COVID response sent a flood of liquidity into the market from both fiscal and monetary directions. This liquidity came directly from governments in the way of subsidies and straight cash. Central banks dropped interest rates further and launched the largest coordinated effort in quantitative easing in history.

This took negative yielding debt to a peak of $17.7 trillion. But it was something that started way before we even knew how to spell the word “COVID.” The QT (Quantitative Easing) policy errors kicked off in earnest during the 2008 financial crisis but then were expanded over the course of the following years.

Any time a central bank even hinted at a “tightening”, the market would freak out, and the central banks would “back off” their policy adjustments. This just increased the market’s addiction to low rates and free money creating the absurdity of the chart below.

It’s also worth noting that the below chart of “negative yielding debt” only encompasses bonds that traded negative on a nominal level and not on a real level- or “adjusted for inflation.”

Inflation Outpaces Wages: A Recipe for Disaster

The rise of inflation primarily impacts the poor and middle class. Wages typically fail to cover the additional “cost” that comes along with inflation. Unless you are fully invested in an offsetting asset, your buying power will keep being reduced.

The below chart puts into perspective just how far off the earnings power is to the purchase price of a home. Asset prices have skyrocketed across the board, and it limits the ability for individuals to cross income brackets.

In the “good old days”, people would purchase a “starter” home to build up equity and eventually sell to move up to a bigger home or a different region. This appreciation enabled many in the lower and middle class to increase asset values by trading up.

Even with elevated mortgage rates back in the 1980s, the savings rate was still well over 10% and helped to offset the cost of inflation. In 2023, we still have inflation of over 6% with savings rates at only .25%.

The below chart does a great job of putting into perspective how inflation has been draining the purchasing power of individuals going back to 2008. Hourly earnings increased by 4.4% in January, the slowest growth rate since August 2021.

This is the 22nd consecutive month where inflation outpaced the growth in wages, a decline in prosperity for the American worker, and the primary reason why the Fed will hike again. Even though the job market remains tight, we aren’t seeing wages keep pace with the rate of inflation. When we look back over time, there has been a slow bleed in the purchasing power of the average consumer.

The consumer has had to rely more and more on debt and credit card spending to make up for the shortfalls. We have quickly surged past the short-lived decline of credit card debt as excess savings was drained and consumers relied heavily on credit to close the gap in the cost of living.

Food Inflation Threatens Societies

The pressure grows even more when you consider how much money is spent on food every year. The average amount the typical U.S. consumer spends per $1 on food has increased. Pre-COVID, the average person spent .17 -.24 cents per $1, depending on income bracket. That has shifted significantly to .27 – .34 cents. This is a big number when you consider the drain on discretionary spending this creates.

The below chart puts into context just how much food inflation impacts the poor and middle class. It’s a huge drain on spending power. And given the bounce in food inflation, the impact is far from over.

In 2021, households in the lowest income bracket spent an average of $4,875 on food (representing 30.6% of income), while households in the highest income bracket spent an average of $13,973 on food (representing 7.6% of income).

The changing dynamics are impacting everyone, and all the data is showing the same pressure points. In the latest Gallup survey, 50% of Americans say they are financially worse off than last year — the highest level since 2009. It shouldn’t be surprising to see the biggest impact occurring on those in the lower income bracket, but you can see the pain affects everyone.

Food Prices Are Going Up, Up and Away

None of the leading indicators for food are improving. In fact, they are getting worse in 2023. Beverages & food production rose for the second month in a row, with the rate of expansion picking up to the fastest pace since July 2022.

Input cost inflation remained elevated, however, and was slightly stronger than in December. Anyone that has been to the food store can attest to the rise in costs, and the upward movement in prices seems endless.

The cost to the farmer is also moving in the wrong direction. There are so many components and input costs that go into the food we eat, and we are seeing another acceleration of cost increases that will move these prices even higher.

Lower Food Prices: Don’t Believe It

That’s why I laugh when I see headlines like “Food and Agriculture World Food Prices Have Fallen Almost 18%”. Sure, they have dropped back from all-time highs. But it’s important to evaluate the whole story.

Since the lows of the early 2000s, we have seen a steady rise in prices of 155% (or 4.6% annualized) to this point. We are still above the prices that sparked the “Arab Spring”, and this is happening in lockstep of falling wages and rising global inflation on everything – not just food.

So far we have only discussed America, the richest country in the world and a land mass capable of feeding itself. What happens when you are an emerging market relying on the international market? There has been a steady rise of impacts to the global market with about 800 million people facing hunger in 2021. This has only worsened with higher food prices, inflation, and weakening real wages.

Food Insecurity Creates Social Unrest

There is a huge disparity between income recovery that is driven by location, local support, central banks, and a slew of other economic drivers. The poor to middle-income nations are struggling the most and will fail to get back to pre-pandemic levels.

The world is facing mounting headwinds with fiscal drag and tightening monetary policy that will hinder economic expansion. As the income capacity falls, the ability to purchase basic food becomes hindered and drives more local pressure and anger.

This doesn’t mean that central banks should waiver, because stagnate growth and our current predicament was created by irresponsible rate and liquidity policies. Inflation (created by loose monetary policy) has been grossly underreported for years and is finally coming to the forefront. Inflation has a disproportionate effect on the poor, and we are seeing this hit hardest in food prices.

Real wages around the world have fallen with emerging markets, experiencing the biggest drop in their earnings power. The strength in the U.S. dollar and rise in food prices hits countries that rely on global markets the hardest. The “cost” of purchasing abroad increases as the dollar strengthens and their local currencies flounder and weaken.

Global subsidies and government support increased substantially during COVID, and it increased again in 2023 as food shortages have become more pervasive.

A Protectionist Drive Has Begun

Countries have put up more “gates” and “hurdles” for the export of food to ensure there is enough for local consumption. India is just one example of a country that limited the export of wheat and rice, which we described as a protectionist drive. We were proven right in late January as the announcement below was made by the food ministry:

“State-run Food Corp. of India will release 3 million tons of wheat in the open market during the next two months to cushion consumers from rising grain and flour prices. The buyers will be required to convert wheat into flour and sell to consumers at a maximum retail price of 29.5 rupees per kg”

This was a clear step to cool off inflation, but also to ensure that people are placated. Many governments understand the importance of ensuring their constituents are fed because that is how you stay in power. The last thing any government wants is social unrest over food because people will topple governments and go to war to address shortages. Just think about the lengths you would go to ensure your family can eat.

Also, domestic food-price inflation is still soaring, with people in low and middle-income countries particularly hard hit. The most recently available monthly data between September and December 2022 shows rates of increase above 5% in almost all economies globally irrespective of their income levels. As budgets run dry, governments are finding it harder to address the shortfalls and provide the subsidies people need to feed their families.

A Sober Conclusion

La Nina is shifting weather patterns (again) and causing some severe issues with Argentinian and Brazilian crops. The food situation is deteriorating and creating a broad powder keg…

The world is facing a massive shift in polarization as the divide grows. The pressure has been growing for over thirty years, but it has reached a fever pitch as people feel disenfranchised.

Income mobility is at a near standstill, which is having an outsized impact as inflation bites hard. People want answers, solutions, a path forward… anything to help alleviate the stress of the current markets.

This leads people to “grab” onto anything that might deliver a change. Unfortunately, it doesn’t matter how radical it may be. Politicians will take advantage of this “fear” to drive a wedge between factions and drive their own narrative/agenda, even if it's to the detriment of the country or the broader populace. The flames are being fanned from all directions driving the shift in the polarization camp.

While I may disagree with the level of polarization some of these countries have, they are all still moving in the wrong direction. As stress increases internally, the drive to isolate and turn inwards only grows.

It starts with food and quickly spreads to other natural resources to ensure local “stability” or at least prolong that as long as possible. Each country will also react differently based on local dynamics driven by internal factions, tribes, or outside influence. Food and underlying inflation only fan the flames of anger because it results in less economic mobility.

It shouldn’t be a surprise that the biggest threat for people is tied directly to inflation, the ability to earn money, and food. The below top risks are driving the polarization and anger to new heights. Given the issues across many supply chains, there is no quick solution or short-term way to alleviate the problems.

Our Recommendations

But there is a way to try to capitalize on these shifts.

Our recommendations are two of the largest providers of food in the world.

Bunge Ltd. (NYSE: BG) is an American agribusiness and food company, incorporated in Bermuda, and headquartered in St. Louis, Missouri. As well as being an international soybean exporter, it is also involved in food processing, grain trading, and fertilizer. The company has approximately 32,000 employees in 40 countries.

Some of its operations include:

  • originating oilseeds and grains from the world's primary growing regions and transporting them to customers worldwide;
  • crushing oilseeds to make meal for the livestock industry and oil for the food processing, food service and biofuel industries;
  • producing bottled oils, mayonnaise, margarines and other food products for consumers;
  • crushing sugarcane to make sugar, ethanol and electricity;
  • milling wheat and corn for food processors, bakeries, brewers and other commercial customers; and
  • selling fertilizer to farmers.

The company also is in a joint venture with a French company producing product for the biodiesel market.

Bunge reported earnings recently with strong results and positive guidance through 2023:

“Looking ahead to 2023, we expect the market environment to be similar to 2022 with many of the same drivers still in place. That includes a globally tight crop supply, strong demand for our core protein meal and vegetable oil products, and the continued impact of global trade of commodity price volatility and supply chain disruptions. We also expect to see global demand for feedstocks and related services for renewable fuels continue to grow. Based on what we see in the market in the forward curves today, we expect full-year adjusted EPS of at least $11 per share for 2023.”

Archer Daniels Midland Co. (NYSE: ADM) is an American multinational food processing and commodities trading corporation founded in 1902 and headquartered in Chicago, Illinois.

The company operates more than 270 plants and 420 crop procurement facilities worldwide, where cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial, and animal feed markets worldwide.

Also, ADM ranked No. 54 in the 2020 Fortune 500 list of the largest United States corporations.

Similar to Bunge, ADM has also invested heavily in fuel production and plan a spending increase in bioenergy projects, focusing on bioethanol and biodiesel.

The company had a similar take on the market with margins improving across their core businesses.

“2022 was a truly outstanding year for ADM. As we look forward to 2023, we expect another very strong year. There are a number of market factors that we see as relevant for shaping our performance. We still see tightness in supply and demand balances in key products and regions. We see strong demand for vegetable oil, driven largely by robust demand for biodiesel and renewable diesel. Resilient food demand should drive higher volumes and margins in starches, sweeteners and wheat milling. We see continued strong demand for ethanol, including positive discretionary blending economics.

We have a strong playbook powered by our deep expertise and our unparalleled footprint and capabilities to manage a dynamic market environment. Our healthy balance sheet provides ongoing optionality as we continue to pull the levers under our control to deliver results. And we expect positive contributions from productivity and innovation initiatives across the company that will help us drive value in 2023. Taken together, we expect to deliver another very strong year in 2023.”

This year is shaping up to be another tight one for crops, which is going to create more opportunities for each company to maximize their supply chains. Size and scale matters when supply chains are tight. both of these companies provide product to the largest food processors (such as Pepsi) down to bio-diesel markets that remain tight.

Based on everything we highlighted above, there is going to be a lot of support for companies that can achieve economies of scale and sourcing.

Both companies are finding ways to connect farmers with consumers and creating more efficiencies with technology synergies.

That’s why now is the time to invest further in the fertilizer and food processing space!

Action to Take:

***BUY BG down to $98 and up to $99.50***

***BUY ADM down to $80 and up to $81***

Good Hunting,

Freedom Financial News