In today’s Exponential Investor

  • Fragility of supply chains exposed
  • Got Milk? Doubt it…
  • Food insecurity leads to political instability

A couple of centuries ago, we could only buy what was made or grown near where we lived. Shipping cargo was incredibly inefficient. All cargo had to be loaded piece by piece and was prone to being lost at sea.

The railroad changed all that. Mass transportation of non-perishable goods became a reality. Shortly afterwards, the combustible engine gave us the car, then the truck, which lead to the creation of warehouses. As urban areas got more dense, vertical stacking became de rigueur, and, by the end of the 1930s, all hail the forklift.

World War II brought an urgency to transfer that we’d never needed before. Speed of distribution was critical. Logistics streamlined packing, unpacking, transportation and handling.

As the war ended, and the baby boomer era began, so, too, emerged the concept of containerisation. Everything learned from land logistics was being applied to shipping via containers. Intermodal mattered. Things had to be moved from ship to port to land to truck to warehouse in one package, reducing both time and costs.

Some regions, such as Asia, set up dedicated container shipping ports. Many western economies stuck to traditional style of ports.

As flares hit the catwalk, computing technology turned logistics into a digital enterprise, and real-time warehouse tracking came into vogue just as safari suits were on their way out.

Asian countries with well-established shipping ports opened up their land and cheap labour began to embrace manufacturing and exporting products to the west.

“Supply chain managed” became the ubiquitous phrase as Excel was created. Spreadsheets controlled inventories, mapping, and all routes via air, boat, rail and truck. All before the stock market crashed in 1987.

In less than a hundred years, the supply chain was global.

Not much is home grown

The past hundred years was about to maximise more for less.

Access to energy from far off places right through to being able to eat fruits grown in the opposite climate.

The development of the supply chain has contributed to phenomenal growth for many businesses and people. It’s less of a chain, more a complex web with insecure tethering points. When one of those tethers gets blown about in the wind, the whole web flaps in the breeze. (Covid showed us just how fragile it is.)

Brexit happened, and goods and labour got caught up in paperwork snarls…

… and now the Russian invasion is piling pressure on.

More to the point, it’s forcing those in the UK to face the uncomfortable reality of just how many things come from beyond its borders.

I’m not talking about all things Ikea, either. I mean food.

Some people think about 50% of the UK’s food is imported, which is incorrect. 80% of all UK food is imported. The lower number just represents food made in the UK, but doesn’t acknowledge that this food is made from imported ingredients.

This makes Britons highly vulnerable to changes in both global food prices and supply disruptions.

And those disruptions may be about to get a lot worse.

Third-world problem becomes UK’s reality

Three weeks ago, the German headquarters of Aldi announced that up to 400 products will be “significantly more expensive” in the coming weeks. Many of us can look forward to price hikes of 20-50% on everyday items such as butter and meat.

Even this budget-friendly giant won’t be spared. And its situation isn’t unique. Not only are food prices increasing, but the prices of imports that make the food are also going up, which is putting extraordinary pressure on local farmers, and, in a worst-case scenario, risks food insecurity in the UK.

FarmingUK, a consortium that represents UK farmers, recently shared some alarming data.

Its AF Aginflation Index showed a whopping 23% increase in farming inputs in the six months to March 2022. This comes on the back of a 22% increase in annual data reported in September 2021.

The consortium’s numbers show that four out of nine farming inputs saw double-digit increases in the past six months. The worst were animal feed (up 27%), fuel (up 29.4%), and fertiliser (up a whopping 107%).

To boot, there is a chance that these inputs have not yet made their way to consumers, judging by the sharp up curve in the AF Aginflation Index compared to the UK’s RPI Total Food inflation measure.

Farming inputs compared to rising food costs

Source: FarmingUK; AF

Thus we arrive at our two-pronged problem: not only have food prices got longer to run higher, but at a time when local UK farmers are likely to reduce their output.

You see, at present, farmers are the ones bearing the immediate cost of higher input prices such as fuel, animal feed and fertiliser. They are yet to be able to pass these costs on to manufactures.

Because costs are rising so steeply, famers are actively reducing the number of egg-laying hens, or dairy cows, for example, because of the high cost of feed.

The immediate upside is more animals available for slaughter, so few people see the pressure building. The consequence of this, however, is that breeding animals which replenish the flock or heard are gone. Breeding a new a flock is possible within a reasonable time frame. But rebuilding a heard of heifers and cows can take years.

Furthermore, even a useless urbanite like myself understands how critical nourished soil is for a successful harvest. Triple-digit price increases for fertiliser mean that farmers are faced with a no-win decision. Do they farm less land with what fertiliser they can afford to buy and produce fewer crops? Or do they farm more land with the normal amount of fertiliser in the hope they can yield the same crop quantities?

Smaller harvests, stock and farming animals hurt everyone in the long run. It starts with price increases and ends with a devasting reduction in food sources available.

More so, food insecurity risks lead to political instability…

You’re a consumer first and investor second

The question here is: what should an investor do?

Remember that you are a consumer first and an investor second. This is useful, because you can look at your own consumption behaviour to pick up on investment trends as prices rise and potential supply snarls become visible.

Second, know that investing opportunities will present themselves. Farming REITs (real estate investment trusts) proved very popular with the onset of Covid. They’ve had one heck of a run in the last two years, though.

Other ideas may come from the support sectors to the farm industry. Keep an eye out for companies that are looking to reduce energy needed, fertilisers that don’t rely on gas and oil… and perhaps even innovative farming techniques that change how food is grown.

Until next time,

Shae Russell
Co-editor, Exponential Investor