Global warming is a big battle; ESG investing is the way to go

It is the month of May and perhaps the peak of Indian summer. While you were prepared to battle the heat, you are caught unawares by a sudden burst of strong winds and heavy downpour. While the sudden rain and winds did manage to bring temporary relief from the hot summer, you are still trying to reason out why it rains in summer? Consider this: The FAO Sugar Price Index rose 6.8% in May 2021 (from April), marking the second consecutive monthly increase and the highest level since March 2017. The rise in international sugar price quotations was mostly related to harvest delays and concerns over reduced crop yields in Brazil, the world's largest sugar exporter, as the prolonged dry weather conditions impacted crop development. (source: FAO – Food & agriculture organization of UN)Welcome to Global Warming. Global Warming is not a prediction, it is happening. Global warming is a term that we have now been used to hearing / discussing for a reasonably long period of time. Global Warming is already affecting the human kind, plant and animals in a number of ways through increased ocean levels, droughts and changed weather patterns. It is well recognized by scientists around the world as serious public health and environmental concern. The Impact of Global Warming on Agriculture was known to many, and it was expected that the effect may be seen after many years, but the fact is that Global agriculture is already on a tear and rightly so. Global food prices rose in May at their fastest monthly rate in more than a decade. The FAO Food price index rose by 4.8 % in May (compared to April 2021) and almost 40% higher than in May 2020. Similarly, the FAO cereal price index rose by 6 % compared to April 2021 and almost 37 % higher than May 2020. (source: FAO – Food & agriculture organization of UN)Climate change is intensifying drought, heat waves and wildfires as warmer temperatures dry soils faster and weather patterns shift. Grain inventories have now been drawn down to levels that could easily slip into dangerous zones if weather in the 2021 growing season becomes even slightly problematic. The initial signs are ominous. Brazil, one of the largest corn, coffee and sugar producers in the world is already witnessing its worst drought in 20 years. Sowing of the spring grain has been delayed in Russia and Ukraine due to excessive snow in 2020. Global weather patterns have changed and will continue to remain volatile. The Eastern coast of India has witnessed two back to back cyclones over the last one year. The one in 2020 was partly responsible for the sharp 70% jump in domestic tea prices which are yet to come back to previous levels. Climate changes will impact productivity and lower yields. Researchers estimate that rice yields may fall by as much as 40% over the next 80 years as increased temperatures release more arsenic into the fertile soil. The winter wheat crop in Northeast China suffered due to extremely cold weather, in our view and consequently Chinese wheat imports are likely doubled to 10 mn tonnes in the last season. As per the latest report from US Department of Agriculture (USDA), global grain inventories will remain flattish in 2021-22e with stock to use ratio going down to 27%. (Stock-to-use ratios show the balance between supply and demand for a given commodity. Higher stock-to-use ratios mean more supply is available while lower ratios suggest a tighter supply situation)China has emerged as one of the largest importers of corn over the past year. In CY2020 alone China imported roughly 17 mn tonnes of corn as compared to an average of 5 mn tonnes annually between 2010 and 2019. Further, China has already imported roughly 5 mn tonnes in Jan-Feb 2021. Why is China importing so much corn? China is rebuilding its pig population, 50% of which was lost to the swine flu in 2018-19. China is also expanding its dairy and poultry industries, both of which are big corn consumers. Moreover, China has committed to increase its US ethanol by 200 mn gallons in 1HCY21 (corn is a raw material for ethanol). Global corn markets are now facing a huge new source of demand that literally didn’t exist even one year ago. As China imports more soya to raise its pig population, global soya bean prices have also been on a tear, rising 15% YTD. While corn inventory is expected to go up by 3%, higher than expected demand from China and US coupled with production loss can result in a flattish scenario as well, in our view. Rice inventories are expected to fall 4% in 2021-22 driven by China and India. And it is not just cereals, cotton and oil seeds will also likely witness a lower inventory this year. Grain inventories are now at extremely low levels and strong demand will face off against volatile global weather patterns. With inventories now reduced, a perfect 2021 planting and growing season is the only way for grain prices to remain stable. Any disruption in 2021 crop growing conditions could put significant upside price pressure on grain prices. Since time immemorial, humanity has always wondered whether it will be able to feed itself. The question remains pertinent even now.Hope Hunger is not our Biggest Battle in the future. It is high time we care and consider the environment. Rapid development coupled with deforestation and the use of fossil fuels is making the globe warmer. Businesses need to consider the impact of the energy they use and the waste they produce. Businesses also need to consider the human impact of climate change and use of energy. Every company must assess its current effect on the environment. When it comes to investing, ecologically minded investors are happy to invest in responsible companies and create wealth without a negative impact on society. There is an increasing affinity of investors towards ESG investing. ESG stands for Environmental, Social & Governance. It is no longer how much profits businesses make; it is about how they make these profits.(Source: Bloomberg, Axis MF Research)(The author is Head of Equity at Axis Mutual Fund)

from Economic Times https://ift.tt/3lkK6BI