Emerging Markets: Food producers gain on inflation story – BNY

BNY’s Geoff Yu highlights strong flows into EM food producers as supply disruptions through the Strait of Hormuz and higher fertilizer and energy costs push food prices up policymakers’ agendas. Australia, Brazil and Argentina are seen benefiting via commodity exports, though BNY warns that government intervention and price caps could limit margin expansion in staples.

Food inflation supports EM staples flows

"Even if a settlement is reached – and the Strait of Hormuz reopens – certain supply challenges will continue to affect global headline inflation through the rest of the year. The implications for policymaking and asset allocation are substantial."

"Food prices are moving swiftly up the agenda: According to the Center for Strategic and International Studies, 20%–30% of global fertilizer exports transited the Strait of Hormuz prior to the conflict. The region also produces significant amounts of energy byproducts used in fertilizer production elsewhere, all of which transit the Strait of Hormuz."

"Climate pressures in the coming months are also expected to raise food production costs, with knock-on effects on supply and final prices. In its rate hike last month, the Philippine central bank noted that “higher global oil and fertilizer prices have begun feeding through to domestic fuel and food prices.” We expect to hear similar statements across EM, where food insecurity is more acute."

"The conflict has mostly generated positive terms of trade shocks for “geographically unexposed” energy exporters, but we expect food and soft commodities to begin performing as well. For economies such as Australia and Brazil, whose export baskets comprise both groups, industrial commodities and energy will drive the bulk of adjustment."

"If global inflation continues to pick up, the staples sector is expected to benefit in a defensive sense. That said, the risk of government intervention is high – see the recent U.K. initiative asking supermarkets for voluntary price caps – and margin expansion should not be assumed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)