Equity Analysis /

Food processors may outperform producers in super-cycle driven by war in Ukraine

  • The war in Ukraine has created a surge in food prices. We suggest investors consider a portfolio of Asian food stocks

  • The 2006-10 food spike saw food processors such as Wilmar and Olam benefit

  • Food processors offer better exposure to the food boom than producers such as palm oil stocks

Food processors may outperform producers in super-cycle driven by war in Ukraine
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
14 March 2022
Published byTellimer Research

The food super-cycle has been accelerated by the war in Ukraine. Irrespective of the outcome of the conflict, our view is that an extended period of high food prices is likely.

We have identified a set of Asian food stocks that provide exposure to the food boom. The Bloomberg Asia Pacific Food Index was devised in 1998 and is a capitalisation-weighted index of food stocks in Asia.

It includes the following categories:

  • Food producers such as A2 Milk Company

  • Food processors / supply chain companies such as Olam and Wilmar

  • Branded producers such as Charoen Pokphand Foods.

Bloomberg Asia Pacific Food Index

During the 2006-08 food price boom, the Bloomberg Asia Pacific Food Index performance outperformed the food price rise.

Performance during the 2008 food price hike

Over this period, the outperformers among the Asian Food stocks were the processors and supply chain players, rather than the producers. The market rewarded these companies as they were viewed as beneficiaries of higher food prices. The outperformers included COFCO Sugar, one of the largest sugar supply chain companies in the region, and Wilmar International, the largest palm oil processor.

Commodity processors (also known as traders) prosper by exploiting market inefficiencies, collecting margins from the difference between the sellers and buyers of a commodity. The spread is a function of commodity prices. Commodity processors' profits are strongly correlated with commodity prices.

The underperformers included branded consumer companies such as Charoen Pokphand Foods and Thai Union Group. These are companies that use food commodities as inputs. Though they can pass on food price increases to the end-users, the market did not reward them as well as the food processors. We are bullish on Charoen Pokphand Foods on a fundamental basis, but it may not be a primary beneficiary of the food spike.

Other poor performers included food producers such as A2 Milk and palm oil producers. The producers may not have performed as well as the processors because their investment case was directly linked to the commodity price. Investors may have been worried that the input prices (such as fertiliser) of the food producers would eat into the margin improvement.

This time around, some food producers such as the listed palm oil stocks may disappoint because of ESG concerns. Palm oil prices are up 43% ytd and at an all-time high price of MYR7360. However, the palm oil producers such as Golden Agri and IOI are only up by an average of 7% ytd.

The key reason for the underperformance of the palm oil producers is ESG issues, as the sector is viewed as detrimental to the environment. The palm oil producers have been accused of illegal logging in Indonesia and Malaysia, and many NGOs have urged fund managers to boycott palm oil. Wilmar is principally a processor and is therefore not subject to these ESG pressures to the same degree.

Key stocks during the 2008 food price crisis

Performance: 2006-2008

In short, investors should be mindful of the following:

  1. Investors can get exposure to the food price spike by investing in listed food stocks.

  2. Food processors such as Wilmar and Olam have in the past risen in excess of the food price spike. This is because their operating margin is correlated to food prices.

  3. Food producers and branded consumer players are less likely to be beneficiaries. ESG concerns may weigh on some food producers like palm oil stocks.