How likely is food price inflation?

31 March 2021

Over the past decade, food price inflation hasn’t been an issue that troubled the financial markets; however, we believe that could change soon.

Food for thought

Food prices have trended significantly lower over the past decade for many reasons and have, to a large extent, underperformed other commodities and asset classes. While the last half of 2020 saw a rise in food prices, long-term forecasts from the Organisation for Economic Co-operation and Development suggest real food prices will likely remain at or below current levels for the next 10 years.¹ We have a slightly different view—we think consensus is underpricing the risk of a further sharp increase in food prices.

Having underperformed for 10 years, food price inflation is making a comeback (%)

Source: Bloomberg, Manulife Investment Management, as of 4 December, 2020. Green bars represent cumulative 10-year returns for various asset classes. Blue bars represent cumulative 6-month returns for soft commodities (food items).

Food price inflation typically affects the lower-income group most since food purchases account for a bigger portion of their household income. Therefore, a sharp, unexpected rise in food price inflation could widen the income gap between the haves and have-nots, exacerbating a situation that has already been made worse by the COVID-19 outbreak.

While policies put in place to contain the economic damage brought about by the pandemic have so far helped to prevent a financial crisis, it’s important to recognize that quantitative easing—a key component of the global response—has worsened income inequality through asset price inflation. In our view, a protracted period of food price inflation, when combined with other forms of bad inflation, will weigh on aggregate demand, denting global growth prospects.

Understanding food pricing—supply-and-demand dynamics

Commodity prices rising since April 2020

Source: Macrobond, Manulife Investment Management, as of 4 December, 2020.

The COVID-19 pandemic has triggered a surge in Consumer Price Index (CPI)-measured food price inflation, driven by an increase in demand for groceries and the shift from dining at restaurants and schools to eating at home. Governments have also built up strategic food stockpiles to insulate their economies from further supply disruptions. On the supply side, the pandemic has shuttered food processing plants and disrupted global trade. Extreme weather events—from droughts in the United States, Russia, and Brazil to flooding in China, Vietnam, Malaysia, and Indonesia—have also negatively affected harvests and supply chains around the world, sending crop prices higher. The Bloomberg Agriculture Spot Index, a gauge of nine crop prices, has risen by roughly 30% since late April to highs not seen in nearly four years, reversing a near decade-long downtrend in global food prices.²

Food price inflation has consistently outpaced headline inflation in the past year (%)

Source: Macrobond, Manulife Investment Management, as of 30 December, 2020.

That said, it’s important to note that food price inflation was already trending higher before the pandemic. A quick analysis of food price inflation (relative to the CPI) in a broad range of economies confirms this. For instance, CPI food inflation in Mexico has risen to 4.6 percentage points above headline CPI inflation. In Q3 2018, CPI food inflation was 2.4 percentage points below headline CPI inflation.²

Structural demand and supply drivers

The rise in food price inflation isn’t only COVID-19 related—structural drivers also play a key role in determining price levels.

Key structural drivers of demand

Rising population and income growth in emerging markets have led to an increase in appetite for more protein in these economies. Unsurprisingly, the income elasticity of protein demand is much higher for poorer households than richer ones. Demand for protein among households in developed markets has also risen as a result of the growing popularity of plant-based diets on the back of rising concerns over environmental protection and obesity.

Key structural drivers on the supply side

Many factors have contributed to keeping a lid on food supply. The multi-year decline in food prices has disincentivized new agricultural investments to the extent that growth in agricultural supply hasn’t kept up with demand; water supply and arable land have decreased (the former due to global warming and the latter due to erosion, pollution, and over farming), limiting growth in global food production; urbanization and industrialization—particularly in emerging markets—have created a new source of competition for land needed for agriculture; and, finally, the frequency of extreme weather events such as plagues, floods, and bushfires have increased alongside climate change concerns, which is negative for harvesting.

Inequality and food distribution

Research from the United Nations World Food Programme shows that the number of people facing acute food insecurity could have doubled to nearly 265 million last year—an outcome of the COVID-19 outbreak.³ Meanwhile, Oxfam forecasts that 12,000 people die from hunger every day as a result of the pandemic.⁴

Indeed, food security was already an issue pre-COVID-19 and, as with many other issues, the pandemic has simply exposed that vulnerability. Food security isn’t just a problem for poor economies, it’s also a growing issue in rich countries. For instance, in the United States, nearly 28 million adults—13% of all adults in the country—reported that their household sometimes or often didn’t have enough to eat.⁵ Meanwhile, food bank lines have grown longer during the pandemic and school closures have also meant that some children who depended on schools for a daily meal have gone hungry.

The United Nations Food and Agricultural Organization highlights four key pillars of food security:

Availability, which relates to production, distribution, and exchange;
Access, which relates to affordability, preferences, and allocation;
Utilization, which is the quality and safety of food; and
Stability, which is the ability to obtain food over time.

Income and class inequality directly affect access to food produced. Indian economist Amartya Sen, who won the Nobel Prize in 1998 for his work in welfare economics, argued that famine wasn’t caused by a lack of availability, but because people didn’t have the money and, importantly, the power to access food that had been produced.⁶ Africa is a good example: Since 2000, hunger in Africa—proxied by the prevalence of undernourishment—has increased by 25.8% despite the fact that food production has simultaneously increased by 8.6% per person.⁷

Inequality isn’t a new issue, but it has gotten worse in the last decade, amplified by a few developments:

Fiscal/development programs that lead to more debt and austerity in poorer nations. These programs often involve a combination of food subsidy elimination, an increase in the price of public services, wage reductions, trade and market liberalization, deregulation, and the privatization of state-owned assets. These policies invariably lead to more debt, economic stagnation, and unemployment, the latter of which makes it even harder for marginalized segments of society to access food. Crucially, such policies tend to enhance the power and/or control that corporations have over the production and distribution of food, for instance, free trade agreements often protect corporations and limit public intervention.
Food speculation: Multiple rounds of global quantitative easing and economic stagnation in the past 13 years have created a low return environment, forcing investors to source returns in nontraditional ways. This has accelerated the growth of financial speculation, which has also affected the commodity market, thereby contributing to increased volatility in world food prices.
Land grabs: Foreign direct investment such as the purchase of land/development rights often plays an important role in the growth of a developing economy; however, without adequate regulations, these agreements can leave the host economy with a larger foreign debt pile. These transactions can also be detrimental to the household sector through the outright reduction in control over food production processes. As farmers are moved off their plots, they not only lose access to their crops, which not only represent losses in their income and their livelihoods, but also an important source of food supply. Environmental degradation could also occur as a result of urban development.
Food security concerns, social unrest, and stronger trade protectionism: More than any other commodity, food is of strategic importance from a national security perspective given how food shortages could spark social unrest. The last protracted run-up in food prices dates back to 2011, which contributed to the Arab Spring. Understandably, governments are incentivized to play an active role to minimize food shortages. Intervention could take the form of price controls (domestic policy) and trade protectionism (foreign policy), or a combination of both. However, in a globalized world, attempts to protect an individual economy’s self-interest can create distortions in the global supply-and-demand balance. In our view, it may not take much of a rise in global food prices for trade protectionism in agriculture to escalate.
High debt loads: Economies with high debt burdens at both the private and public sector level—already vulnerable to rising food prices—will be weakened further by a sudden spike in food prices. In such a situation, households will have less income to spend on food, businesses will have less room for agricultural investment, and governments will have less fiscal space to absorb higher prices through food subsidies and other fiscal spending. This is particularly important in today’s context because COVID-19 has exacerbated debt burdens globally.

Z-scores—which economies are most likely to be most affected by food price inflation?

To objectively gauge which economies could be most vulnerable to food inflation, we calculated z-scores⁸ for 31 economies/regions—which we follow regularly and believe to be a good representation of the global economy— based on multi-year averages of the following variables that, in our view, are good indicators of exposure to food price volatility:

Prevalence of undernourishment
Net food exports expressed as a percentage share of GDP
Renewable water resources
Availability of arable land
GDP per capita
Household food consumption expressed as a percentage share of household expenditure.

By calculating a composite Z-score from each of these variables, we find that of the 31 major economies/regions we tracked, the most vulnerable to higher food prices (highest Z-scores) are the Philippines, India, Indonesia, Vietnam, and China. The least vulnerable to higher food prices (lowest Z-scores) are Australia, Canada, New Zealand, Norway, and the United States.

Z-scores—which economies are most exposed to food price inflation?

Source: World Bank, EIU's 2018 Global Food Security Index, Food and Agriculture Organization of the United Nations, Manulife Investment Management, as of December 2019. The results shown are based on Z-score calculations of 31 economies that provide a comprehensive view of the global economy. Z-scores are calculated based on multiple-year averages of prevalence of undernourishment; net food exports as a percentage share of GDP; agricultural water withdrawal as a percentage share of total renewable water resources; total internal renewable water resources per capital, arable land (hectares per person); GDP per capital; and food consumption as a percentage share of household expenditure.

Key takeaways from our calculations:

Asia remains more vulnerable to the rise in food price inflation relative to other regions.
It’s reasonable to expect that those most vulnerable to food shortages may step up efforts to secure global food and water supply chains.

Implications

While food prices may not appear as relevant to global markets as U.S. Federal Reserve decisions or the announcement of large fiscal packages, it’s important to remember that a food and/or water crisis represents a sizable investment risk with far-reaching economic, social, and geopolitical implications.

In our view, markets have underappreciated the risks associated with food price inflation and the widening income gap—calls to address chronic hunger through a necessary structural reform of economy and institutions, including the redistribution of wealth and power, are likely to grow louder. As these issues come to the fore, we could see heightened political risk, particularly in key areas of the world where hunger, exacerbated by the COVID-19 shock, is evident.

1 Organisation for Economic Development and Co-operation, December 2020.

2 Macrobond, as of 4 December, 2020.

3 United Nations World Food Programme, 21 April, 2020.

4 “12,000 people per day could die from Covid-19 linked hunger by end of year, potentially more than the disease, Oxfam warns,” Oxfam, 9 July, 2020.

5 “Tracking the COVID-19 Recession’s Effects on Food, Housing, and Employment Hardships,” Center on Budget and Policy Priorities, 15 January, 2021.

6 Poverty and Famines: An Essay on Entitlement and Deprivation, Amartya Sen, 1981.

7 Food and Agriculture Organization of the United Nations, 30 November, 2020.

8 A Z-score describes the position of a value in terms of its distance from the mean (average). It is measured in terms of standard deviations from the mean.

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General Risk Disclosure

Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
Some funds with significant exposure to RMB bonds/equity/assets may hold a significant portion of assets in deposits if there are not sufficient RMB instruments to invest in. This may adversely affect the funds’ return and performance.
Some funds using Qualified Foreign Institutional Investor (“QFII”) quota to invest directly in debt instruments/shares in Mainland China may be subject to various requirements and restrictions under the laws of Mainland China related to QFII investment and custodial risks.
Some funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
As RMB is not freely convertible, currency conversion is subject to exchange controls and restrictions. There can be no assurance that RMB will not be subject to devaluation. Insufficient amount of RMB for currency conversion or devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated class(es) of certain funds. The “Dim Sum” bond market is still a relatively small market which is more susceptible to volatility and illiquidity. Due to RMB concentration risk, the value of the funds with substantial RMB exposure may be more volatile than that of a fund having a more diverse portfolio of investments.
Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.

Manulife Global Fund

Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market, geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G) and R MDIST (G) share class(es). Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds.
Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.