Thursday, November 25, 2021
The New Face of Hunger - Rising Food Inflation and How to Counter It?
By Century Financial in 'Investment Insights'
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Risks & Assumptions
As global food prices hit decades high, the majority of the global consumers are feeling the pinch. For instance, in Singapore, food banks are busy. In Malaysia, meat is off the menu for a vast majority of the people. The problem is not just limited to poorer Asian countries. In Canada, for instance, a recent poll conducted by Ipsos found out that 4 out of the 5 Canadians are worried about rising food inflation with not enough money to put food on the table and feed their children. The United Nations Food and Agricultural Organization Index is up by 32% from its October 2020 lows. The Bloomberg Agriculture Spot Index is approaching its lifetime high level near the $450 zone. Looking at individual components, prices of Arabica coffee beans and Wheat have more than doubled over the past 18-month period.
Reasons for Food Inflation Spike
A squeezed consumer is bad for the stability of both political as well as global markets and can also turn out to be negative for equities in the longer run. While the jury is still out on whether we will see a sustained run-up in the core inflation and food inflation numbers beyond 2022, the following instruments would be key to watch out for:
1) CMC Agricultural Index (Last Price: $1,647)
The index, up by 19% on a YTD basis, provides exposure to major Agri crops including Soybean, Corn, Wheat, Coffee Arabica, Oats & Other Soybean Derivatives. The Soybean basket consisting of Raw Soybean, Meal & Oil together constitutes around 40% of the index weightage.
CMC Agricultural Index (Duration: Last 3 Years | Source: CMC Platform)
2) Invesco DB Agricultural Fund ETF ($DBA | Last Price: $20.31)
With more than $1.07 billion under its custody, the ETF is up by 25% on a YTD basis. Some of the major holdings of this ETF include Wheat (13%), Coffee (12.56%), Soybeans (12.32%) & Corn (12.31%). The fund holds 66.93% collateral in Invesco Government & Agency Portfolio and the remaining in US T-Bills.
$DBA ETF (Duration: Last 1 Year | Source: Bloomberg)
3) Costco Wholesale Corporation ($COST US Equity | Last Price: $545.26)
The company’s share prices have been on a roll this year. With a gain of 45% on a YTD basis, the stock has outperformed the market benchmark SPX 500 index which has been up by 25%. Unlike Walmart or the Dollar stores which primarily target lower-income consumers forced by circumstances to stretch their dollars, Costco appeals to higher-income consumers who have the discretion to pay higher for the privilege of shopping there. Costco’s 100 million + members enjoy significant savings for everyday necessities oered in bulk sizes to fill pantry shelves. Even the company’s E-Commerce division has overall been on a roll with comparable sales growth of 41.2% in the third quarter and 65.1% YTD. Compared to its peers like Walmart and Target, the stock does appear expensive (Costco P/E of 47.61 as against Walmart P/E of 23.11 & Target P/E of 19.11).
$COST US Equity (Duration: Last 1 Year | Source: Bloomberg)
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data as of: 24/11/2021
Arun Leslie John
Chief Market Analyst
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