Strategy Note /

Winners in the 2022 food price spike? Branded processors and FMCGs

  • The world is in the midst of a food price spike along the lines of 2006-08

  • We have constructed a portfolio of 81 EM food stocks that performed well in the previous food spike

  • The potential winners include branded food processors like Wilmar, IOI and KLK as well as FMCG companies

Winners in the 2022 food price spike? Branded processors and FMCGs
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
14 June 2022
Published by

The 2022 food price surge is in full swing, and investors need to look at the previous food price spikes for insight. We have delved into the detail of the 2006-08 food spike to identify the stock market winners.

The S&P GSCI Agriculture Index (SPGSCI Agri) rose 47% in the period between January 2006 and 30 June 2008. The food price spike was eventually eased by the global financial crisis that ravaged markets in the second half of 2008. SPGSCI Agri dropped 18% during the second half of 2008.

S&P GSCI Agriculture Index (2006 to 2008)

In comparison, the food price spike in 2022 is more muted thus far – SPGSCI Agri is up only 23% ytd. This suggests that this structural bull market in food prices still has a long way to go.

Investors can get excellent exposure to the food price spike through the Asian food stocks. During the 2006-08 food price boom, the Bloomberg Asia Pacific Food Index outperformed the food price rise.

Performance during the 2008 food price hike

We have identified a portfolio of 81 EM Asian Food stocks. Some of the Bloomberg Asia Pacific Index stocks such as China Agri and Want Want have been delisted since 2008 but there is still a wide selection. The stocks on the following list include producers such as palm oil plantations, as well as processors like Wilmar International. The list also has FMCG companies such as Unilever Indonesia.

The EM Asian Food stocks portfolio rose 59% in the previous food price spike, as shown below, outperforming both the S&P GSCI Agri Index and the MSCI EM Index. In other words, investing in these stocks during a food price surge beat investing in the broader stock market or the food commodities themselves.

Portfolio vs. MSCI EM vs. SPGSCI Agri (2006 to 2008)

The performance of the Asian Food stocks can be divided into three categories:

Category 1

  • These companies had superior performance in the 2006-08 food spike.

  • The category includes highly branded Fast Moving Consumer Goods (FMCG) companies such as Nestle India and Nestle Malaysia. It also includes branded processors such as Wilmar and IOI. Wilmar was (and still is) the world’s largest palm oil processor. It controls the leading edible oil brand in China – Arawana. IOI is also one of the leading palm oil refiners.

Category 2

  • These companies recorded average returns. They are typically Agri producers, which operate as commodity players. They include palm oil plantation operators that have limited brand recognition.

Category 3

  • These food companies underperformed the peer average during the food price spike. The category is dominated by price takers. The margins of these companies are compressed by a food spike. For instance, Charoen Pokphand Foods' (CPF TB) branded component in 2006-8 was about a fifth of its revenue. The remainder of its business was dependent on input prices (mostly corn and soybean). The company was unable to pass on the input prices to its end-user. Hence, CPF TB underperformed during the 2006-08 food price spike. The same applies to other price takers such as rice producer REI Agro and seed producer Bisi International.

EM Asian Food stocks

Key takeaways

  • The 2006-08 food price spike shows that investors can outperform both the index and commodity prices by investing in the EM Asia Food stocks.

  • Within the EM Asia Food sector, the outperformers in the previous period of high food prices tended to be branded players and/or processors. These were companies whose operating margins were lower than pure agricultural producers. However, the market ascribed superior returns to branded processors such as Wilmar International.

  • In the current food spike, we urge investors to focus on branded food processors such as Wilmar International, IOI, KLK, Nestle India and Nestle Malaysia.