In today’s Exponential Investor:

  • The crippling cost of living
  • Making friends with rocks
  • Countries who hit the geological jackpot

Many, many years ago – some idyllic time between the end of acne and before crow’s feet, I walked past my local grocer and saw several pallets of iceberg lettuce. An odd memory, I agree. But hear me out on why this matters.

There was pallet upon pallet. Far too many lettuce to put on the shelves. Plus, lettuce only has the shelf life of a loaf of bread, so they can’t be stored for long.

What was this family run business to do? Flog ‘em for the cheapest price they could.

Within minutes, the eldest son of the grocer was out the front of the store with the pallets and he whacked on a sign saying “99 cents each” (a little over 50p).

As he began to trim the heads of the lettuce, people started to swarm around. Picking up one, or two. Some even grabbed three. Who needs that much lettuce?

A couple of hours later, the lettuce fire sale was over and the pallets were clear.

Why on earth would I waste your Tuesday talking about something that is 99% water?

Because over the weekend I discovered that same green-leafed vegetable is now AU$10 a head (£5.72). I suddenly longed for the days when I could pick one up for less than a buck. But it’s not just those. Tomatoes are now AU$13 per kilo, and fresh green beans have hit AU$39 a kilo…

The land of plenty is now facing its own cost-of-living crisis, too…

And it’s set to get worse. For both of us.

“Things will get harder”

A cost-of-living crisis isn’t new for anyone in the UK. Arguably, Australia just caught up. The head of the Bank of England has called the cost of living in the UK “apocalyptic”. In contrast, Australia’s treasurer has gently noted “things will get harder” for Australians. Insightful, aren’t they?

Until recently, many in the UK might have thought Australia was immune to rising food prices. Given that Aussies grow pretty much everything they need on the island continent, surely they are protected from the same fate as the Brits?

Unfortunately, not…

Rising food price inflation
UK (blue line) Australia (black dotted line)

Source: Trading economics

While people in the UK have been feeling the pinch since around September last year due to supply chain disruptions, Australians have witnessed creeping food-price inflation due to weather-related events in the past couple of years.

In spite of the different causes, we are both still facing the same problems. That is, food prices are extremely expensive and are showing no signs of easing.

In fact, there is a chance that things are about to get even worse as a confluence of factors is pushing our food prices higher and now neither of us can escape it.

Let’s start with the UK.

Since Christmas last year, beef, butter, and milk – to name a few – have seen almost double-digit price increases in the previous 12 months. Then we have the price of oils and sauces – the very stuff that makes our vegetables palatable – screaming higher. These condiments rely on sunflower and rapeseed oil… of which 55% comes from Ukraine and Russia.

While the fragility of food supply chains is one reason, it’s not like local UK farmers are making bank either. As I wrote here, they are under just as much pressure as consumers.

Then we have Australia.

Australia is currently on its third, back-to-back La Niña event since 2020, which means everything is wet and soggy. You’d think it would be a blessing after the catastrophic bushfires of January 2020. Or the drought over 2017-2019.  Moist soil is needed for growing after all. Problem is, you can’t grow much if the ground is flooded.

And all of these events mean farmers Down Under can’t grow much, and Aussies need $10 bucks for a lettuce and quadruple the price for green beans.

Two separate countries with the same problem: cripplingly high food prices and no end in sight.

Actually, scratch that. It’s about to get worse. Way worse.

Looking for new business partners

Unpredictable weather in Australia and fragile supply chains in the UK are butting up against our worst foe: the cost of energy.

Essentially, the price of our food represents the cost of energy and labour. If oil goes up, food goes up. If labour is scarce or people demand higher wages, food prices go up.

And this is the double whammy for both Australia and the UK. The cost of energy is sky-rocketing with no end in sight and it’s taking food prices with it.

The cost of energy is littered throughout the entire food growing to production process. Gas and oil are a key component of fertilisers, plastics, manufacturing and delivery of goods. Without either, nothing grows out of the ground, nor does it make its way from raw good to canned or packaged products.

While food prices were moving higher prior to the Russian invasion of Ukraine, the invasion has just cemented the fragility of global supply chains.

So much so that the pre-Russian war “just-in-time” supply chain is switching to “just in case”. And that means countries are going to ditch old suppliers for countries on friendlier terms. Or at least ones at far less risk of facing US sanctions.

At a recent conference at the top end of Australia, a miner noted that the country “would have its day” when it comes to a particular type of mineral used as fertiliser, saying it would be like the 1970s all over again, when we sold our coal to Europe. That just perhaps Australia could supply the European region with all the fertiliser it needed, allowing it to bypass Russian and Ukraine fertilisers. And claiming that, while Australian products wouldn’t be cheaper, the supply would be stable.

Whether Australia has the answer to high food prices remains to be seen. Rocks stuck in the ground aren’t much help to today’s food prices.

But the key takeaway is this: the quick solution to the cost of living crisis won’t work.

What investors need to know is that it’s structural problems that are driving the cost of living higher. Once you understand this, you can learn to invest with the trend, rather than simply be a victim of it.

One of the biggest winners of this decade will be commodities and countries who hit the geological jackpot. The kicker will be the lands with stuff we need and the governments not only opening to mining but their willingness to share the bounty with others.

The UK’s best friends might not be in the European Union… but Australia and Canada.

Until next time,

Shae Russell
Co-editor, Exponential Investor