Credit Suisse Analysts Expect Rising Food Prices will Create Challenges for Asian Governments but Opportunities for Investors
Credit Suisse today released a report on Asian food and rural income, addressing one of the dominant themes in current Asian economics and politics. The report, written by Credit Suisse analysts across the region, argues that Asia’s desire for food selfsufficiency could rival the developed world’s drive towards energy self-sufficiency over the next 10 years and that incomes for the 1.7bn Asians dependent on agriculture could double by 2015, giving rise to a new kind of consumption wave.
For investors, Credit Suisse’s analysis reveals more than 100 stocks that can provide exposure to the six main themes explored in the report: rural income beneficiaries, farm input producers, farm investmentrelated companies, plantation related companies, low-end processors and food-to-fuel companies.
With rice and other foodgrain prices reaching long term highs, the critical importance of food to the social and political systems of many large Asian countries has been thrust to the top of the agenda. Based on the food self-sufficiency score that Credit Suisse analysts created, consumption exceeds domestic production in the nine Asian countries covered in the report. Regional administrations have felt obliged to revert to old-fashioned, reactive measures such as export bans and trade controls, which exacerbate the problem of rising food prices and inflation. Credit Suisse also expects government subsidization to increase, putting pressure on fiscal deficits. Regional farmers’ low incomes will also push governments to increase their efforts to boost investment in the sector - most administrations currently spend less than 1% of Gross Domestic Product on agriculture, mostly through subsidies.
Although ensuring food availability will be the short term priority, the report’s authors expect Asian governments to make efforts to achieve food self-sufficiency through better yields in the longer term. This is a long term imperative for the region: total acreage supply in Asia has only grown at 0.3% annually since 1990. At present, Asia’s stock-to-use ratio in foodgrains is declining. Food consumption has grown 4% annually since 1991, while agricultural GDP growth has only been 3.7%, causing food inventories to reach 30 year lows. Credit Suisse expects food demand to grow at 3.7%-3.8% annually over the next 10 years as food consumption patterns shift and calorie intakes increase.
As food accounts for a third of Asian personal expenditure, 15% of GDP and the livelihood of 55% of the region’s population, the importance of food economics cannot be underestimated. And while the high price of rice has captured headlines recently, price escalation could soon emerge in another market even after rice eases. This, say Credit Suisse’s analysts, is because food demand and supply are relatively inelastic in aggregate, but elastic for individual products, causing price pressures to shift from product to product.
Despite the macroeconomic and policy implications of rising food prices, this trend could have positive consequences for personal incomes and corporate earnings connected to agriculture. The 1.7bn people in Asia who make their living from agriculture currently have per-capita income of US$328 - about 10% of the per-capita income of other Asians. Credit Suisse’s analysts argue that, if this begins to increase at 10% annually, a new kind of Asian consumption wave could begin.
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