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Global Food Price Fall: Can Brazil Benefit?

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Those investors keeping close tabs on global weather patterns know that a stronger than usual El Nino is developing. Experts say it’s the strongest in 20 years, and expect it to peak in November and continue into 2016, dumping, among others, colossal amounts of rain on the main corn and soybean producing areas of North and South America, notably Brazil—a country that for multiple reasons, is probably the least favorite emerging market, but could, some say, stand to benefit from the El Nino effect.

Recently, Standard & Poor’s downgraded Brazil’s credit rating to junk status. The Brazilian real has suffered a massive depreciation and the dramatic fall in commodity prices has impacted Brazil, a major exporter, in a bad way. The Brazilian economy is battling inflation and political tension in the country is rife.

But Brazil accounts for much of global food production and is slated to produce 40% between 2015 and 2020, said Michael Underhill, co-founder of agribusiness investment firm Capital Innovations. As such, increased precipitation as a result of the El Nino effect and subsequent increased production could provide a “tailwind” to the economy.

“Right now, Brazil looks like it’s bottoming so this could be an opportunity to pick up companies on sale,” Underhill said.

A good example is South American agricultural company Adecoagro, which owns farmland in Brazil, Argentina, Uruguay and elsewhere in South America, Underhill said. The company went public in 2013, catching the eye of high profile investors like George Soros as a long-term investment play for its arable land holdings.

Underhill is also optimistic about sugar production in Brazil, where a rise in the production of sugar-based ethanol is expected as a result of the increase in the mandatory blending ratio in gasoline and the provision of favorable tax incentives. At the same time, though, increased food production has translated to a fall in food prices, and last week, the United Nations’ Food and Agricultural Organization (FAO) flagged a 5.2% drop in world food prices, the biggest slide since 2008, which has brought food prices to a six-year low.

The agency pointed to the fall in energy prices and the negative impacts of China’s economic slowdown on the global economy and financial markets as the main reason behind the fall. China, of course, is a huge consumer of commodities, agricultural commodities included.

In real terms, the prices of all agricultural products are expected to decrease more over the next ten years, Underhill said, as production growth, helped by on-trend productivity growth and lower input prices, outpaces slowing demand increases. “While this is consistent with the tendency for long-term secular decline, prices are projected to remain at a higher level than in the years preceding the 2007-2008 price spike. Demand will be subdued by per capita consumption of staple commodities approaching saturation in many emerging economies and by a generally sluggish recovery of the global economy.”

Still, lower food prices do benefit consumers, particularly those in emerging markets, said David Harriss, chief investment officer at Rockefeller & Co., and this in turn could prove somewhat positive for those emerging economies that are increasingly driven by consumption.

“Generally speaking, if you are an emerging markets consumer, the fall in food prices is a big windfall, though the one caveat is that you have to look at each home currency because we have seen significant currency depreciation in so many emerging markets,” Harriss said. “Commodities have taken a huge hit but there is some benefit to this as a disproportionate share of your wallet is spent on food and energy when you are an emerging markets consumer, so this can potentially work out well.”

There are major changes happening in the demand patterns of developing countries, where continued but slowing population growth, rising per capita incomes and urbanization all increase the demand for food, Underhill said. Rising incomes also prompt consumers to diversify their diets by increasing their consumption of animal protein relative to starches. For this reason, the prices of meat and dairy products are expected to be high relative to the prices of crops, he said, while among crops the prices of coarse grains and oilseeds used for feed should rise relative to the prices of food staples.