Investors sift emerging markets for food-price bets

By Sebastian Tong

LONDON | Mon Feb 21, 2011 7:09pm IST

LONDON (Reuters) - Record-high commodity prices have spurred a broad retreat from emerging markets but some investors are bucking the trend, sifting through these economies in search of selective winners from the rising cost of foodstuffs.

Dwindling supplies of wheat, corn, soybean and oilseeds have driven soft commodity prices to record highs, undermining expectations of surging consumer demand in economies where households can spend more than half of their incomes on food.

After a 16 percent gain last year, the benchmark emerging equity index is down 3 percent this year, lagging the 5 percent rise in global markets so far.

Yet the impact of higher food prices is not uniformly negative in these economies.

"Everybody's panicking about food prices because we're looking at it from the urban perspective," said Jonathan Schiessl, Asian equities investment manager at Ashburton.

Investors have zeroed in on some commodity exporters as outperformers while others are looking at sectors poised to benefit as countries step up food production.

In Argentina, one of the world's top wheat exporters, the local stock benchmark hit lifetime highs last month while expectations of higher palm oil prices fuelled the roughly 15 percent equity jump in Sri Lankan shares this year.

As developing countries intensify efforts to boost farm productivity, infrastructure and machinery firms such as China's First Tractor Co. Ltd. and Indian utility vehicles maker Mahindra and Mahindra are shaping up to be attractive bets.

Rising rural incomes is another investment theme that has come to the fore with the global focus on food production.

Investors say farm wages in many developing economies should rise in tandem with government efforts to raise crop yields. This, in turn, is expected to fuel demand for consumer goods among the rural population that remains dominant in many developing economies.

"The most obvious winners from higher food prices are farmers. We expect rural incomes to rise this year in China, India and across commodity producing nations and we're looking for companies that are selling directly into the rural economy," said Ashburton fund manager Schiessel said.

These include firms that sell farming machinery as well as those selling consumer staples such as cigarette maker ITC and detergent-producer Jyothy Laboratories in India, he said.

DOWN THE VALUE CHAIN

Stock-pickers are, however, avoiding downstream food-processing firms. Many are unable to pass on the higher cost of their raw materials to consumers because some governments have imposed price controls on food staples.

source - in.reuters.com