GUILD INVESTMENT

M A N A G E M E N T April 21, 2022

GLOBAL MARKET COMMENTARY

Food Markets Signaling: Red Alert
Last week, we wrote that commodity markets flationary cycle, we recognize that we have
were signaling that “This Is Not a Drill,” and an obligation to our clients to be as effective
discussed events driving energy and industri- as possible in playing “inflation defense” with
al and precious metals. We deliberately didn’t those clients’ savings. That means remain-
discuss soft commodities -- i.e., foods. Below ing aware of important trends, including
are some thoughts about foods, food inflation, trends in agricultural commodities, and
fertilizers, the potential consequences for food navigating them in a way to enhance
and beverage manufacturers and retailers, and that defense if possible. Being aware and
the possible wider geopolitical effects on food prepared is one thing -- but we certainly hope
import-dependent developing countries in the worst scenarios do not come to pass.
particular.
Food Crisis: Inflation, War, and Frac-
A Letter We Wish We Didn’t Have To tured Supply Chains
Write
Inflation and supply-chain disruption were al-
Even though there will be beneficiaries of cur- ready factors in play thanks to the pandemic
rent developments, we don’t want to reduce responses from policymakers -- including the
this issue to solely an “opportunity” for inves- lockdowns, shutdowns, confusing signals from
tors. Food crises are unmitigated humanitar- government, and of course the monetary and
ian catastrophes. In a system as complex, in- fiscal tsunami. Russia’s invasion of Ukraine
terdependent, and unpredictable as the web of has dramatically escalated the effects of
global agricultural commodity production and these disruptions on global food supplies.
supply chains, catastrophic consequences can

© Guild Investment Management Inc.

follow disruptions in unexpected ways; a case Russia and Ukraine are both critical suppliers
study is the European migrant crisis of 2015, of wheat and corn (as well as barley, a less-sig-
whose effects are still far from exhausted. nificant feed grain), as well as important seed
(Consider the tight polls in upcoming French oils, including canola and sunflower oil.
elections, and the remarkable rebirth of the
Front National.) Ukraine’s supplies are threatened because
perhaps half the country’s agricultural land
It is not our desire to find ways to profit from will not be planted this spring, and even if hos-
human misery. As we analyze the current in- tilities are quickly resolved (which seems in-
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M A N A G E M E N T April 21, 2022

EDITORS creasingly unlikely), normalization as well. Russia and Belarus are

will take a year or two. (Inadequate key suppliers of potash, an essen-
seed stocks will hinder planting, as tial fertilizer component -- but urea
will the potential need to remove and ammonia produced from nat-
mines and military refuse from mil- ural gas via the Haber-Bosch pro-
lions of hectares of farmland.) Fur- cess are critical as well, so fertiliz-
ther, Ukraine’s agricultural exports er shortages and soaring fertilizer
mostly depart the country via ports costs are a further, compounding
on the Black Sea, all of which are component of the crisis. Indeed,
now closed to shipping traffic -- and the current convergence of
MONTY GUILD which are particularly desired tar- sanctions, hydrocarbon short-
Founder
gets of Russian strategic interest. ages, production shortfalls, and
stranded supplies are creating
Russia’s (and Belarus’) supplies are a “perfect storm.”
threatened due to sanctions, and
the inability of global supply chains Food Inflation Bubbling Up In
to quickly re-route that supply to the Developed World
willing buyers (e.g., China -- which
has historically represented a very Naturally, this negative supply shock
small destination for Russian wheat will not remain confined simply to
exports). food grains and their immediate de-
ANTHONY rivatives, such as seed oils -- simply
DANAHER Notably, it is food-dependent Mid- because those grains are essential
President dle Eastern countries which are components of packaged foods
the most sharply exposed to these worldwide. Indonesian store
export shortfalls, and which will shelves are already almost
be scrambling to make it up -- via bare of the country’s favorite
price-fueled demand destruction, noodles, which are made with
rationing, the release of strategi- Ukrainian wheat. But beyond the
cally held stocks, etc. Turkey, Egypt, developing world, the push in recent
Lebanon, and Tunisia are all particu- years in the developed world to-
larly exposed. As we’ve mentioned wards highly processed plant-based
before, the last widespread episode staples has increased the exposure
RUDI
© Guild Investment Management Inc.
of political instability in Middle East- of many large food producers to
VON ABELE ern countries was occasioned by a grain prices, while plastic packaging
Senior Research
Analyst food inflation shock in 2011 and and elongated supply chains have
2012. Depending on the trajecto- increased their exposure to energy
12400 Wilshire Blvd ry of current events, this has the costs.
Suite 820 potential to be a still more severe
Los Angeles, CA 90025
disruption. As it turns out, devel-
310-826-8600
oped-world consumer demand
guild@guildinvestment.com Of course, global hydrocarbon for packaged food is quite
Mon–Fri 06:30–16:30 supply issues are central here “elastic” -- that is, the ability of
 GUILD INVESTMENT
M A N A G E M E N T
Source: Bloomberg, LLP
brand-name food manufacturers to pass rising
costs through to consumers is relatively limit-
ed before those consumers will begin shifting
towards cheaper alternatives, bargain brands,
etc. Margins of packaged food manufactur-
ers will be squeezed -- although those brands
with idiosyncratic loyalty and high demand
might fare relatively better. Brand loyalty is
everything in this context.
In discussing packaged food, another
item looms large, even after including
raw material and energy costs -- and
that’s labor. We just read that “employees
at 540 [California] Ralphs, Albertsons, Vons
and Pavilions stores from San Luis Obispo to
San Diego will receive raises of 19% to 31%
over current levels, while part-time employees
-- around 70% of the workforce -- were guar-
anteed 28 weekly hours, up from 24.” Union
negotiators noted that “the company was
afraid of a strike.” This phenomenon will
continue and expand, and retailers will see
margins decline as a consequence.
All of these components will be adding
to the price pressures seen by devel-
oped-world consumers at the cash reg-
ister. This of course is not anywhere near the
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April 21, 2022
kind of existential issue that sparked an upris-
ing in Tunisia in 2011 -- but combined with the
“pain at the pump,” it may have a significant
effect on political dynamics in the developed
world.
All of that being said, no matter where you
are in the world, history suggests that political
leadership during a period of declining stan-
dard of living often does not remain “leader-
ship.” There is a lot that goes into determining
the “standard of living,” but front and center is
the availability of affordable food, and it looks
like there is lot less of that around. Belt tight-
ening looks like a global trend, but of course
some belts will be cinched more than others.
Producers (Who Can Produce) Benefit
Potential beneficiaries include grain produc- © Guild Investment Management Inc.
ers in other “breadbasket” regions -- including
the U.S., Argentina, Brazil, and India. Strong
planting and export boosts from these sourc-
es would help to calm anxiety-driven price
spikes, as would any resolution of Russia’s war
against Ukraine that permits more planting to
occur. The fact that corn’s price is outstrip-
ping soybeans suggests a rotation of U.S. farm-
ers from soy to corn.
 GUILD INVESTMENT
M A N A G E M E N T
Which brings us to another issue that
will certainly arise: it may be that cur-
rent events prompt a rethinking of the
(to us) unconscionable dedication of so
much U.S. corn supply to ethanol pro-
duction, a policy boondoggle of epic
proportions. In a global food crisis, the
spectacle of food being burned to pow-
er vehicles -- especially when ethanol
Investment implications: The stage is
being set for rising and possibly accel-
erating food prices; a base case might
see strong prices through the rest of
this year, while a less likely case could
see higher and longer-lasting price pres-
sures amounting to a global food crisis
The Markets This Week
What is Happening In China?
Shanghai, and many other Chinese cities, are
once again under extreme covid lockdown
conditions -- the most stringent since April
2020, as China pursues its apparent “zero
covid” policy. The images and videos perco-
lating through to western social media are
profoundly disturbing, and prompt a question:
what is China really up to? As the rest of the
world has largely settled into an acceptance
of covid as a new, endemic, dangerous, but
manageable seasonal illness, and has rolled off war.
restrictions and mandates and left such deci-
sions to individuals, China has crushed eco- Invest in China at your own risk, but fol-
nomic and shipping activity in its most eco- low China closely as it holds many glob-
nomically significant city. Why?
We have some conjectures – an effort of the
Chinese leadership to assert and secure con-
trol, an act of solidarity with Russia, an act
of telegraphing the west’s economic vulner-
4
April 21, 2022
requires a significant amount of energy
to produce – may (read “should”) finally
become politically intolerable.
And of course, with central banks tightening,
the higher price of money makes it more dif-
ficult to pencil out capex expenditures that
would contribute to an easing of supply pres-
sures.
with complex political and geopolitical
ramifications. Packaged food producers
will face eroding margins from raw ma-
terials, energy, and labor, as will food re-
tailers, and some reliable dividend-pay-
ing consumer staples stocks may come
under pressure as a result.
ability and dependency on China. Or is (as
some may fear) their “zero tolerance” covid
policy driven by some particular knowledge
that they have about the long-term effects of
the pathogen itself? All of these are no more
than conjectures. In any event, the effect on
global supply chains -- which had begun to
unsnarl the original pandemic knots -- will be
significant moving forward. Global auto pro-
duction is already declining again, both due
to supply chain disruptions and due to raw
material disruptions from the Russia/Ukraine
© Guild Investment Management Inc.
al economic keys.
China watchers are trying to figure out what
comes next, and there are lots of theories and
guesses. Bank of America Merrill Lynch shared
a few possible scenarios with investors this
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M A N A G E M E N T
Source: Goldman Sachs Research
week, saying “uncertainties to persist,” “base
case: lockdowns till mid-May and reopening in
2023,” and “bear case: lockdowns to spread
until reopening at yearend.” Our strategy is
to follow the data (as unreliable as it may be),
and while China could decide to stimulate ag-
gressively, and China-related stocks could be
a good short-term trade, we typically want to
choose investments that offer more transpar-
ency than one finds in China.
How’s the Consumer?
Corporate earnings season has started,
and in management conference calls
we are getting signals that discretion-
ary consumer spending is beginning to
show some cracks -- here’s looking at
you, NFLX. The more discretionary, the
more risk -- and as we noted above, even
consumer staples are not perhaps the invul-
nerable fortress they are sometimes touted
to be. We have a lot of calls on deck for the
next two weeks -- and we’ll let you know
what we hear.
5
April 21, 2022
An Unrelated Observation -- Are There
Fewer Buyers For Longer-Dated Mer-
chandise?
In a conference call webinar that we broad-
cast a few weeks ago, we encouraged inves-
tors to “stay liquid and agile.” Recent years
proved to be a good period for private fund
opportunities, and many performed very well
for investors who got in early during a peri-
od where money was “free.” Our recent ob-
servation is that we have started to receive
more solicitations for private investment,
private real estate, and private equity
funds. By this we mean that more private
fund sponsors have been reaching out to us © Guild Investment Management Inc.
with offers targeted at qualified investors --
including funds touting exposure to pre-IPO
tech companies.
Even though we do not invest in private
funds for our clients, we are being solicit-
ed. Aside from the fact that the good private
funds do not solicit investors who don’t buy
privates, it makes us question whether there
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M A N A G E M E N T
isn’t a reduction of overall demand for these
investment products. If that is the case, our
advice is to stay away. As we said above, past
returns of many private funds were very good,
but past returns may not be very relevant in
an environment where money will likely cost
a lot more than it has. These are typical-
ly not liquid investments, and when you
are stuck in them, “agile” is not how
one would describe them.
On the subject of pre-IPO investing, we en-
courage investors to understand the phe-
nomenon of the “down round” and looking
for new buyers. The usual buyers are looking
at the investment landscape and concluding
(quite rationally) that this is not the time to
be diving into investments whose fruition
6
April 21, 2022
lies years or a decade in the future. So then
they imagine that marks might be found by an
appeal to “get in” before the companies go
public. If anything, this is a sign that the
shelf life of profitless unicorns is rapid-
ly expiring -- and if such opportunities
come your way, we would advise you to
be very sober about valuation.
Our Next Zoom Call
We’ll be hosting a Zoom call on May 5, fol-
lowing the Fed’s next meeting. We look for-
ward to discussing all these topics in greater
depth, and hope to see you there.
Thanks for listening; we welcome your calls
and questions.
© Guild Investment Management Inc.
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M A N A G E M E N T April 21, 2022
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