The worst US drought in 50 years is having a big impact on agricultural commodity prices, with the world preparing for its third food crisis in the space of five years.
A new briefing note from Fidelity Worldwide Investment has taken a closer look at what this means for investors.
Agricultural commodity prices are rising again, with soybean and corn prices recently hitting new record highs. There has also been a big increase in the price of wheat.
In addition to crop shortages in the US, as a result of the worst drought in 50 years to hit their important agricultural region, many are also blaming US laws that divert large amounts of corn for use in the manufacture of bio-fuels.
When food prices increase sharply, the ability for consumers to spend money on other goods and services is reduced. This could have an impact on the fragile global economic recovery, as well reducing the ability for central banks to provide further economic stimulus with the fear of rising inflation.
Fidelity also points out some of the structural issues associated with rising food prices.
Economic growth and rising affluence in many emerging market economies is increasing demand for meat and dairy products in particular.
Investment opportunities to take advantage of this theme include investing in fertiliser companies. Fidelity identifies stocks such as Potash Corp, Uralkali and Mosaic which outperformed significantly during the last bout of food price inflation.
There are also stocks such as Shenguan Holdings, the dominant sausage casing manufacturer in China, which could benefit from rising food prices.
For most investors, the best way to access this theme of rising food prices is to allow a professional fund manager to select individual stocks which should benefit.
Food is a key investment theme for the 21st century, with a growing population and limited global infrastructure for agriculture likely to push up prices over the longer term.
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