The Globe and Mail

It’s often hard to think of food prices in investment terms, because all of us are, first and foremost, captive consumers of food. Since we have no choice but to buy the stuff, it’s difficult to see rising prices as anything but bad news.

In which case, I have some bad news, and some worse news.

First, the bad news: The United Nations’ Food and Agriculture Organization says its global food price index hit a record high last month, exceeding the pre-crash peak of 2008.

Now, the worse news: The commodity charts suggest prices may have plenty of room to go higher.

For the consumer side of our brains, the message may be “stock up on canned goods.” But if you tune in to the investor side of your brain, you may detect a different signal – “stock up on grain futures.”

Record prices – yet still cheap

Stéfane Marion, chief economist and chief strategist at National Bank Financial, said that despite the recent surge in food prices, the rise has been nothing, on a historical basis, compared with that for other key globally consumed commodities. In a research note this week, he pointed out that on an inflation-adjusted basis, world food prices are barely one-third of what they were in the mid-1970s – while base-metal prices have soared to near historic peaks. The numbers suggest that while commodity markets have already milked most of the upside from base metals, agricultural commodities may have much more room to climb.

Within the agricultural segment, grain prices may still have the most upside potential. In a note to clients this week, Brockhouse Cooper global macro strategist Pierre Lapointe noted that while the FAO’s overall food price index and its meat sub-index have hit record highs, the cereals sub-index is still almost 15 per cent below its 2008 peak.

Fed by fundamentals

For investors, though, there’s another factor when it comes to agricultural commodities: The U.S. dollar.

A weak greenback has been a key driver in the commodity rally of the past year, as commodities generally trade worldwide in U.S. currency. But with the U.S. dollar recently finding strength in improving economic data, the danger for commodities is that the currency could recover as the U.S. economy gains traction, delivering a blow to commodity prices.

But both Mr. Lapointe and Mr. Marion argue that the food-price rally has a strong fundamental basis: Supplies are shrinking and demand is rising. Forecasts for 2011 wheat production, for example, suggest that global production will fall significantly short of consumption.

“Unlike gold, there is an actual fundamental demand for these commodities – they are going to be used for something,” Mr. Lapointe said. “We prefer them to precious metals, despite periodic bouts of exuberance and oversubscription.”