House Mountain Partners

The Underappreciated Significance of Food Security and Fertilizers

Chris Berry

By Chris Berry

Though many disinflationary forces still predominate around the globe, more and more is being said about food inflation. We still believe in the primacy of food security as forces as disparate as the weather and urbanization coalesce to push the price of food upwards.

Some recent headlines reinforce this assertion:

Food Prices Surge as Drought Exacts a High Toll on Crops – WSJ 3/18/14 (subscription req’d)

Brazil Drought Jolts Commodities' Prices – WSJ 3/4/14 (subscription req’d)

Rising Food Prices Bite into Household Budgets – USA Today 3/19/14

It's also not just the "staples" like wheat or meat that have seen prices trending upwards. Even shrimp are experiencing price "hyperinflation", to borrow a phrase from Business Insider:

Source: Business Insider, Morgan Stanley

Source: Business Insider, Morgan Stanley

The dramatic increase in shrimp prices is reportedly one of the reasons Darden Restaurants (DRI:NYSE) is trying to spin off its Red Lobster seafood chain. Clearly, the restaurant can't pass along a price increase to a consumer without the means to pay for it.

Not surprisingly, as food price increases have started to garner headlines, central banks and governments are pledging to step in and ease the pain:

Brazil central bank pledges to limit food inflation jump – Reuters 3/18/14

 Government involvement can, of course, take many forms including trade agreements. China and the Netherlands recently committed to signing a trade agreement where the Chinese will "import" Dutch dairy expertise to increase both the quantity and quality of Chinese dairy products:

China, Netherlands to sign trade pacts, including deal on dairy cooperation - 3/23/14

 And perhaps most worryingly, as food prices increase, wages have not kept pace. While consumer prices in the US have risen by 6.4% since 2011, the price of chicken is up 18.4%, ground beef is up 16.8% and bacon (a personal favorite) is up 22.8%. Median income has reportedly only gained 1% over the same time frame.

Source: Wall Street Journal

Source: Wall Street Journal

The charts below, though slightly dated, show the trend in price inflation of select food items.

Counteracting This Trend

 There are several ways to protect against rising food prices, but educating yourself about technologies and geopolitical developments is a good start. With Russian President Vladimir Putin's moves in annexing Crimea, several of Moscow's allies, including Belarus, are rethinking their relationship with Moscow. You'll remember that Belarus is one of the most important potash producers on the globe. If Belarus eventually becomes "in play" in the same way Ukraine is/was, this could have continued profound implications for global fertilizer markets. If you have a subscription, please see the excellent article in the most recent edition of Foreign Affairs titled, "Belarus Wants Out: One of Russia's Closest European Allies Begins to Play the Field".

 Improving agricultural output can also help mitigate rising food prices and this is why we have been close followers of the fertilizer space. Brian Ostroff of Windemere Capital, has penned a piece discussing the fertilizer markets and the implications for Arianne Phosphate (DAN:TSX, DRRSF:OTCBB). You can view his thoughts here.

 We will be returning to the fertilizer markets in the Notes shortly as it appears that there has been movement and consolidation in the space which brings with it opportunities.






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