It’s time for a thought experiment. Imagine we have taken the controls of the Large Hadron Collider and set out on a journey to the past, to find out whether food commodities might have been the ideal place to ride out the economic storm.

Remember the Large Hadron Collider (LHC)?

That’s the massive - and somewhat controversial - subterranean particle accelerator built near Geneva by the European Organisation for Nuclear Research (CERN).

It was first activated in September 2008 and, rather than creating the exotic and lethal phenomena that some had feared, it failed almost at once… an expensive and disappointing fizzle.

The reconditioned LHC went back into operation in November 2009 and, as of February 2010, it became the highest-energy particle-colliding… thing ever constructed.

The world’s more ambitious physicists are now looking forward to the creation of, amongst other things, Higgs boson particles … better known as “God” particles.
 

So far so good...

	If you could travel back three years, which commodities would have been best to invest in?

If you are reading these words, it is safe to assume that none of the other associated ill effects predicted by critics – spontaneous creation of black holes, demonic incursions, formation of deadly strange matter and so on – have come to pass.

Or, at any rate, they have not come to pass yet.

While we wait, a number of interesting possibilities present themselves.

Two Russian scientists, Irina Aref'eva and Igor Volovich, have suggested that the LHC might allow the creation of wormholes in space, allowing a limited form of time travel.

Like on Star Trek.

So, imagine that you travel to Switzerland to volunteer for such a time travel experiment. The scientists operating the LHC yank their Great Big Lever (GBL) and turn the machine up to eleven.

Sure enough, the fabric of space is torn apart and a swirling vortex appears in the air before you, like a cheap special effect.

You step through, enter the wormhole and find yourself transported back three years, arriving in the City of London in March 2007.
 

Not in Kansas any more

The streets and buildings are, of course, instantly familiar but the economic and commercial landscape is strikingly different.

In some ways, the past is every bit as strange and bewildering as Oz.

The FTSE100 index stands at well over 6,000 and the City is buzzing with activity.

Traders in exotic derivatives are rushing about, full of confidence, fuelled by the prospect of large, non-controversial bonuses.

Terms like “sub-prime”, “collateralised debt obligation” and “shadow banking” are little used outside the financial world.

It is still three months before the BBC will first use the term “Credit Crunch” and Robert Peston is still a fairly obscure BBC Business Editor.

With your exclusive knowledge of the future, you alone know what is about to unfold.

You alone know that those exotic derivatives are about to turn bad and that banks which seem invulnerable are about to be rocked to their foundations.

The flood of cheap and easy credit which has fuelled a worldwide boom is about to dry up, plunging many nations into devastating recessions.

So, what do you do?
 

Save the World? Or save yourself?

Your first instinct, of course, is to try to warn people of imminent disaster, to avoid – or, at least, to limit – the damage.

That’s noble. Righteous. Altruistic.

And completely impossible.

Novikov’s Self Consistency Principle indicates that it is not possible for a time traveler utilising a wormhole, to influence the past in any meaningful way.

You can’t save the World but you might, however, be able to save yourself.

A call to your former self might just be enough to convince him to cash in his current savings and investments and make new choices which would limit the personal impact of a global economic catastrophe.
 

Be your own financial advisor

So, what advice would you offer to your former self?

Which assets are most likely to do well in a period of turmoil?

The good news is that there are plenty of options available to conservative, fearful investors: gilts, property, gold, gemstones and so on are all proven “safe havens”.

But trading all of these things requires timing, judgment and a certain amount of specialist knowledge - advantages that you might not have.

You are a grocery professional and your thoughts turn in this direction instead. You advise yourself to invest in the grocery business, buying productive farmland, futures contracts and basic foodstuffs.

Then, mission accomplished, you step back into the wormhole and return to March 2010.
 

Back to the future

You step, shakily, out of the wormhole and back into the LHC control room. As the scientists power-down their equipment and sweep up stray God particles, you head for the nearest computer to check on your financial status.

Three years on, after a period of unprecedented mayhem, how have your investments in food performed?

And, more importantly, have they performed better than any of the traditional hedges against economic troubles?
 

Three year investment performances

Sources: as indicated, best fit with stated periods

Plainly the food investments have been very strong performers, even though the commodity price “spike” of 2007-08 is now long past.

In fact, selective investments in food may have left you in a better position than some of the more traditional “safe” choices.

Putting it another way, if you had bought a barrel of crude oil and a barrel of sunflower oil back in Spring 2007 then stashed both in your larder, the sunflower oil would have accumulated value faster over the interim than the crude.

Commodities traded in Dollars would have performed especially well, since the Pound has declined in value by around 25% versus the Dollar over the last three years, providing an extra “bonus”.
 

Why have foodstuffs performed so well?

The food factor

But why has food done so well?

It’s simple: in contrast with some other investments the fundamentals supporting food commodities are solid and easily-understood.

Speculators and professional traders play a role, of course, but most buyers in the commodity markets buy goods in order to use them and, in most cases, little or no substitution is possible.

Supply of food commodities is also quite inelastic; bringing new arable land into production or raising new herds of animals takes months, if not years, meaning that producers can respond only slowly to changing market conditions.

Production for many items is also seasonal; if the wheat harvest in a particular area – Western Australia, say – produces a disappointing yield, then it will be a full year before more can be produced.
 

So what next?

It is no surprise then that, with global population continuing to rise and the Asian nations growing in wealth, demand for basic foodstuffs has risen steadily ahead of supply.

This can be expected to continue for the foreseeable future, with climate change and dwindling energy supplies introducing new question marks for food availability.

The price of most basic foods on the open market is likely to continue to increase over time and markets are also likely to be characterised by greater volatility.

Smart businesses will wish to insulate themselves from price rises and volatility by avoiding the open market wherever possible; forward-buying, dedicated production and vertical supply chain integration will be vital skills for surviving in a food-constrained world.

(Please note: IGD does not offer investment advice. Past market performance does not give an idea of future market performance).
 

More information:

	The Food & Grocery Monitor - Issue One
	As economic reconstruction gets underway, grocery businesses need to maintain their strategic awareness and insight. The Food & Grocery Monitor will help you prepare now for the marketplace of tomorrow by providing detailed up-to-date research on grocery industry and economic developments.

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James Walton is IGD's Chief Economist. He is responsible for original research, speaking at events, writing articles and reports, including IGD's Food & Grocery Monitor series, and delivering training at the post-graduate level.

James is IGD’s leading author on issues relating to the convenience sector, including consolidation and future forecasting. In his 10 years at IGD he has authored or co-authored over 50 publications.