Frank Abagnale was an American thief who went to prison in 1971. He had a gift that was ideal for a conman of that era — he could fake personal cheques.
This was long before Apple Pay and Next appeared. People used to pay for restaurant bills, hotel rooms and even groceries using personal cheques. In America (an advanced country with backward practices), cheques are still common.
Abagnale’s specialty was to rob people when they least expected it. His charm and confidence was magnetic. Victims were blinded by his smiling manner.
He once criss-crossed the US impersonating a pilot. He was able to travel passing bad cheques. He went from New York to Los Angeles and back, pretending to “recruit” stewardesses. In 2002, Abagnale’s antics were made into a movie starring Leonardo DiCaprio called Catch me if you Can.
Two decades later, a thief with Abagnale’s gifts has reappeared. It is called inflation. It will pick your pocket when you least expect it. It is dressed as a person of authority like a pilot. It steals from consumers when they are asleep. The Ukraine war has driven food prices to record heights. Staples such as soy, corn, wheat and rice cost more in nominal terms than ever before.
Russia and Ukraine are the mainstay of the world’s wheat supply, representing 29% of the world’s wheat exports. Corn exports are also dominated by the two countries.
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The food price spike has made its way to Singapore’s hawker centres. The cost of a chicken rice meal at Lau Pa Sat has risen from $4.00 to 4.50 in the last few weeks.
This 13% chicken rice price spike could be just the beginning. Higher food prices have been looming overhead for years. A new commodity super-cycle is likely. The signs were apparent for a commodity spike even before Russia invaded Ukraine.
One needs to delve into history to understand commodities. Since Abagnale’s heyday in the early 1970s, there have been two commodity bull runs, also known as commodity super-cycles.
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The first began with the Arab-Israeli war in 1973. This conflict led to the Arab nations refusing to sell a drop of oil to the US. Commodity prices, including food, spiralled sixfold. This lasted till 1985, when supply was normalised.
The second commodity super-cycle began with China’s entry into the World Trade Organisation in 2000. Prices accelerated as a result of the post-2008 stimulus packages, ending in 2014.
The last eight years have seen a commodity bear market. Commodity prices went down 57% from their 2014 peak to March 2020. Another commodity super-cycle now seems likely.
Food prices are a glaring example. There has been low investment in food production for decades. Investment in agriculture has been flat over the past two decades at US$10 billion ($13.6 billion) per annum.
The poor investment is surprising. Food consumption in emerging markets, particularly in China and India, has risen sharply. Investment levels in food production are about 20% of the level in 1976– 1980. The war has just accelerated a trend that was long overdue.
In fact, food prices are a fraction of the level in 1972. People should not be fooled by the high nominal How to fight the thief of inflation VIEWS prices. A plate of chicken rice in Singapore cost $1.00 in 1972. Today, it is 450% higher at $4.50.
However, in real terms, food is a lot cheaper. $1.00 in 1972 is worth $7.10 today. Hence, chicken rice is 37% cheaper today than 50 years ago. This suggests that a further upside in food prices could be likely.
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Investors need to protect their wealth from the thief of inflation. One hedge would be to buy gold, which was an excellent hedge during the commodity super-cycle in the 1970s. In 1974, then-president Gerald Ford allowed Americans to freely trade gold. Gold prices exploded, rising nearly 400% between 1974 and 1980.
Today, investors have other options. Commodity ETFs that track gold, oil and food are available. Convenient and diversified, the ETFs can be bought and sold like a stock.
However, commodity ETFs have a problem called the roll yield, which leads to underperformance. These ETFs liquidate their positions at a discount to the spot price. One must guard against the Abagnale of today. Buying into items whose prices are soaring, like gold, food and oil, is an ideal ploy.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns
Photo: DreamWorks Pictures / Netflix
