How to gain from high food inflation?

Financial Planning | admin | December 12, 2011 at 8:27 am

Talk to a homemaker and you can gauge the damage that food inflation has caused. It stood at 10.63% for the week ended 5 November, and as most people would agree, it's hurting everyone. There are, however, people who benefit from it.

Firms that gain from this trend

"Food inflation is benefiting the rural population engaged in agricultural activities," says Abhishek Jain, head of research, JHP Securities. In fact, a rich rural India is good news for many companies due to their exposure to the rising rural incomes and improving financial penetration in rural/ semi-urban areas. The firms that would benefit are Mahindra & Mahindra Financial and ITC, to name a few.

Consumer staples companies, such as Hindustan Unilever, Dabur, and Procter & Gamble, should also benefit from the incremental cash in the hands of the rural population. The firms that offer agricultural inputs, such as Jain Irrigation, Monsanto and United Phosphorous, also stand to gain as farmers look for better ways to improve productivity to meet the increased demand.

So you smell an investment opportunity in the stock market? All you have to do is pick stocks that may directly benefit from inflation. You can even use mutual funds or the commodity route to make it work for you. "We expect food prices to remain strong, and this offers investment opportunities in the form of beneficiary companies," says Jain. The strategy is not new and was last followed in early 2010, but it is more alluring now as food inflation remains strong and the market is off its high, providing a good buying opportunity.

Mutual funds

You don't need professional stock-picking abilities to benefit from the phenomenon. Various mutual fund schemes invest in the shares of companies across the globe that is expected to benefit from growth in agriculture. You can also invest in fund of funds that invest in global funds.

DWS Global Agribusiness Offshore fund and DSP Blackrock World Agriculture fund are two such schemes. However, being feeder funds, there is duplication of costs. Alternatively, you can look at Birla Sun Life Commodity Equities fund—Global Agri Retail option.

These are thematic funds and meant for sophisticated investors who understand risks, such as the cyclical nature of the theme and those related to forex," says Dhruva Raj Chatterji, senior research analyst, Morningstar India, a mutual fund rating agency. These are taxed like debt funds, attracting a higher tax compared with that for a diversified equity fund investing in India. Given the higher exit load, these are suitable only for long-term investors.

Commodity route

The investors who doubt the efficacy of the equity route to riding the inflation wave argue that even though firms may benefit from an upswing in business, a depressed market may not fully reflect the growth in stock prices. Also, there are issues like the competence of the management and government's populist policies that may impact the fortunes of these companies.

"Though some mid-sized companies in the agricultural inputs space offer good growth potential in the long term, corporate governance issues pose a big risk for investors," points out Jain. There is a way to bypass this menace. You can consider buying commodity futures to benefit from the rising food prices.

However, not all food commodities are traded in the futures market. "Given the high cost associated with the rollover of commodity futures and marked-to-market nature of contracts, it becomes difficult for long-term investors to own commodities using futures," says an analyst. Hence, these can be considered by short- and medium-term investors.

In India, barring gold, there are no exchange traded funds that invest in commodities, but you have a host of options overseas. "Agri exchange traded funds are a good vehicle to invest in agri commodities," says Partha Iyengar, founder of Accretus Solutions, a financial planning and wealth management firm.

These invest in agri commodities futures on various commodity exchanges across the globe. As the prices in the futures market go up, the prices of ETF units rise as they follow the NAV of the unit, and vice versa.

So if you are bullish on a particular commodity, say, wheat, buy an ETF that buys wheat futures. You can buy an ETF that short sells wheat futures too, provided you are expecting wheat prices to fall. It's better to check the ETF's investment objective before investing in one.

If you do not have a view on a particular commodity but expect agri commodities to do well in this inflationary scenario, you can pick an ETF that invests in a basket of agri commodities in a pre-determined proportion. Such ETFs help diversify within the agri commodities space and bring down risk.

To invest in these ETFs, you need to open an account with brokers, such as ICICIdirect, which facilitate investing overseas. Portals such as seekingalpha.com also help with informative articles.

Source: Economic Times