The looming prospect of a global food shortage has pushed food prices up to shocking levels, but farmers are not seeing the benefits of $12 lettuce heads flow into their bank accounts.

Food prices globally have rallied since the start of the year and remain above long-term averages, adding to the concerns about cost of living that have dominated political conversations both here and abroad for the past few months.

Instead, electricity bills as much as 40% higher than normal and fertiliser prices twice their usual level have left many farmers in a tight financial spot, with many struggling to pass those costs on to consumers already forking out more than they are used to for groceries – with further gains still a possibility.

Amid these challenging conditions, Australian agriculture businesses have not performed well despite the higher prices paid for produce. The S&P/ASX Agribusiness index has dragged mostly sideways for the past 12 months.

One-year returns at the time of writing were down 1.76%.

With spot prices for the goods these farmers and businesses produce and process continuing to rise, however, the S&P GSCI Agriculture ER index has continued to rally – returning 26.72% in the past year.

Reach Markets’ latest wholesale investment opportunity, Agriculture Inflation Series 1, is designed to give investors exposure to these spot prices rather than the businesses and farms that underpin the market.

This leveraged investment is intended to be a new way for investors to trade this broader macroeconomic trend, while offering capped downside risk and the potential for an uncapped upside performance coupon at maturity.

Join us tonight, Wednesday 15th June at 7pm (AEST), for a live investor briefing where we will discuss why many investors see soft commodities as the next big investment opportunity. Click here to register.

Gas shortage fuels fertiliser crisis

In October 2021, gas, coal and oil prices reached decade highs and helped lay the groundwork for the current price pressure weighing on farmers.

Those prices were the result of a number of factors that gradually reshaped global energy markets throughout COVID, notably the sudden and extreme drop in demand for fuels experienced at the height of pandemic lockdowns, when consumers were no longer permitted to travel.

As these rules were loosened and life returned to normal, demand sprang back far more rapidly than suppliers could keep pace with – a problem compounded by a bitterly cold winter across Europe, which lifted demand even higher and triggered an energy crisis.

Gas prices, in particular, saw sizeable gains during this period – a trend that has continued in 2022 and is pushing up the cost of energy. In Australia, wholesale energy prices lifted more than 140% in the first quarter of 2022, turbo-charged by the gas shortfall.

For farmers, this can translate to increases of 35% to 40% in their energy bills. But the high price of natural gas is also hurting the agriculture sector in other ways.

Natural gas is a key feedstock in the production of nitrogen-rich fertilisers used by farmers to increase their crop production, and the higher prices paid for the fuel have fed into higher fertiliser prices.

Russia’s role as a major supplier of both natural gas and nitrogen fertilisers adds extra complexities – and price pressure – to this market. 

The effects of these compounding challenges can be easily seen in China, the world’s largest producer of nitrogen fertiliser. Wholesale prices for urea – a concentrated solid nitrogen fertiliser – have skyrocketed since the start of the year.

Source: ANZ Bluenotes

The situation has deteriorated to a point where China is now restricting exports of these fertilisers to protect its own farmers and secure their supplies.

In Australia, this has translated to farmers being forced to pay twice as much as they previously have for fertiliser and has meant many are choosing to reduce what they use on their crops, potentially lowering yields.

This is especially true in less economically developed countries where some farmers simply cannot afford to purchase what they need.

Taken together, these market conditions have resulted in agricultural commodity prices climbing at their fastest rate since 2008, attracting the attention of institutional investors looking to benefit from the asset class’s low correlation with equities and historic ability to generate returns during inflationary periods.

Click here to book your spot to find out more about this wholesale investment opportunity tonight, Wednesday 15th June at 7pm (AEST). Or to request the Information Memorandum, please click here.

Reach Markets are the advisors assisting with the management of this offer and may receive fees depending on whether an offer is taken up by investors.

Sources:

• spglobal.com, S&P/ASX Agribusiness Index
• iea.org, What is behind soaring energy prices and what happens next?
• bluenotes.anz.com Global food stocks consumed by shortage
• sbs.com.au, Australia’s gas prices are surging. How did we get here and what is being done about it?
• theage.com.au, ‘It’s really hard’: Farmers feel squeeze of rising power bills