Hedging Against Inflation With… Magic… Beans?
The not-so-fancy word for what we have collectively experienced as a country is “inflation” but I imagine that you already know that. After all, lessons will be learnt, and we have all been learning.
Inflation
Here is a dilemma you are probably familiar with, and one I had this morning after being grossly dissatisfied with my plate of spaghetti:
You buy a 500g pack of spaghetti for ₦240 in May 2021
You buy that same 500g pack of spaghetti for ₦450 in November 2021
Spaghetti stays relatively the same for a year
You buy that same 500g pack of spaghetti for ₦500 in November 2022, but now it is way less filling and serves only 3 adults. I think it's a joke, but someone claims to have counted and discovered that spaghetti now has 413 sticks instead of 550 sticks.
You buy that same 500g pack of spaghetti for ₦550 in July 2023
You buy that same 500g pack of spaghetti for ₦600 in October 2023
You buy that same 500g pack of spaghetti for ₦700 in January 2024, and now it feels like it serves only one adult and a half
The not-so-fancy word for what we have collectively experienced as a country is “inflation” but I imagine that you already know that. After all, lessons will be learnt, and we have all been learning compulsory lessons in finance and macroeconomics.
To restate, inflation occurs when you need more money to buy the same item you used to buy with less money. There are two sides to the inflation coin. One side of the coin looks at the general rise in the price of items and concludes that “things don cost”, while the other says that the general fall in the purchasing power of the currency and laments that “Naira is too useless”.
One other lesson you learn quickly is that you have to try to protect yourself, and your money against inflation on a personal level while waiting for the government to somehow put up a “fight against inflation”. Thankfully, there are a couple of ways to fight inflation, so let us quickly consider our options.
As a Nigerian, what can you do to ensure you have enough money to be able to afford a 500g pack of spaghetti? Here are some possible options:
Get a higher-paying job or a second job so that your new total salary can buy the exact same thing your old salary used to buy.
Of course, this means working twice as hard just to be able to afford spaghetti, and that just sucks. Another problem is that you are chasing a moving target since inflation tends to climb first. So, if there is another increase, you would have to work thrice as hard, or “fwice” as hard, or “fives” as hard. I am allowed to make unfunny jokes too.
Find a way to ensure that the money you earn today does not become useless tomorrow. This is what is known as “hedging against Inflation”.
This means that you take steps to ensure that the money you have today can somehow still buy what it used to buy when you spend it tomorrow, or in two weeks, or in a year.
Hedging Against Inflation
One way to ensure that the money you have today can buy the same items, tomorrow, that it can buy today, is to convert it into another investment, or asset, or currency, or commodity that continues to rise in price. The idea is that when you actually want to spend that money, you can sell off the investment, asset, currency, or commodity at the prevailing price. You should then have more money than you spent buying the asset or investment, and that money will at least buy what it used to buy before.
I beg you in the name of the superior being you believe in, if you believe in any: this is not financial advice. Do not try anything I write about without seeking actual professional advice. I will not be there if you return to tell me you lost your money doing something you saw here.
Now let us play a hedging game.
Hedging with savings
Let us take our first scenario. Here, we do nothing spectacular to hedge against inflation. We only focus on saving the money we earn.
You have some money; you take out ₦30,000 in February 2021 and save it in any of those fancy online savings apps. You earn interest at 10% per annum.
That same February 2021, spaghetti cost ₦240
It is January 2024 and spaghetti now costs ₦700, three times what it used to cost
You take your ₦39,930 (₦30,000 plus interest compounded into ₦9,930 over 3 years)
In 2021, ₦30,000 got you 125 packs of spaghetti at ₦240.
In 2024, ₦39,930 will get you 57 packs of spaghetti at ₦700.
Sorry, you saved, but you did not hedge against inflation. You lost 68 packs of spaghetti.
Your money lost more than half its value.
Hedging with dollars
Let us try this again. Let us take this Twitter user’s suggestion and hedge against inflation using the dollar.
You have some money, you take out ₦30,000 and buy $63 on February 6, 2021 (₦476/$).
That same February 2021, spaghetti cost ₦240
It is January 2024 and spaghetti now cost ₦700, three times what it used to cost
You take your $63 and sell it for ₦80,640 on January 15, 2024 (₦1,280/$), nearly three times what you bought it for.
In 2021, $63 at ₦30,000 got you 125 packs of spaghetti at ₦240.
In 2024, $63 at ₦80,460 will get you 115 packs of spaghetti at ₦700.
Ouch, you came close, but not close enough. You were able to slightly hedge against inflation. You lost 10 packs of spaghetti.
Your money lost a part of its value, but you will be fine.
Hedging with gold
Let us take an example from the Kanuri and Shuwa Arabs of Borno and hedge against inflation with gold.
You have some money, you take out ₦30,000 and buy one gram of gold on February 6, 2021
That same February 2021, spaghetti costs ₦240
It is January 2024 and spaghetti now cost ₦700, three times what it used to cost
You take your gram of gold and sell it for ₦72,000 per gram in January 15, 2024, three times what you bought it for.
In 2021, one gram of gold at ₦30,000 got you 125 packs of spaghetti at ₦240.
In 2024, one gram of gold at ₦72,000 will get you 102 packs of spaghetti at ₦700.
Ouch, you came close, but not close enough. You were able to slightly hedge against inflation. You lost 23 packs of spaghetti.
Your money lost a part of its value, you will be fine.
Hedging with beans
Let us try something insane. Hedge against inflation with an agricultural produce, specifically beans. There is an amazing story behind this idea.
You have some money, you take out ₦33,000 and buy one bag of white beans on February 10, 2021
That same February 2021, spaghetti costs ₦240
It is January 2024 and spaghetti now cost ₦700, three times what it used to cost
You take your bag of white beans and sell it for ₦110,000 in January 15, 2024, more than three times what you bought it for.
In 2021, one bag of white beans at ₦33,000 would get you 137 packs of spaghetti at ₦240.
In 2024, one bag of white beans at ₦100,000 would get you 142 packs of spaghetti at ₦700.
Congratulations, you actually hedged against inflation and beat inflation.
Your money did not lose any value. You also managed to get 5 extra packs of spaghetti.
Real story: this woman in Kaduna revealed to financial inclusion researchers that she takes all proceeds from her daily sales and buys beans with it. Whenever she needs anything, she simply takes a portion of the beans and sells it at the prevailing price that day, actively defeating inflation.
I did some research and found an academic paper that studied inflation trends over 90 years from 1925 to 2015 in the US, UK, and Japan. It turns out that traded commodities i.e. raw materials such as oil, gold, agricultural produce, and livestock perform their best during inflationary periods. They also yield better real returns than investing in bonds and equities! A petty trader in Kaduna discovered, by pure chance, an inflation hedging strategy that took researchers decades to test and prove!
It turns out that general inflation itself can sometimes be caused by inflation in commodities because they are the raw materials for the economy at large. So if the price of maize goes up due to bad harvest, the price of chicken feed goes up because maize is the raw material for chicken feed. Then the price of chicken at the market goes up, and then the price of chicken at your favorite restaurant goes up too. You see how it makes sense that during inflation, commodities like beans could give you a better hedge against inflation.
Look, all of this is very simplistic. There are a lot of factors to consider. I am not certain you can keep a bag of beans for three years, for one. Secondly, a miracle could happen where the government fixes inflation and the price of beans crashes lower than what you paid for it. Lastly, this is NOT financial advice. No one has asked you to go buy beans to keep for three years. If you do that, then maybe you deserve whatever becomes of it.
The point is that magic beans might exist, you just never realized they were your regular beans. There is probably something pretty regular you already know about that could help with your finances if you stopped for a minute to consider it.
I’d love to hear from you if you already found some interesting ways to deal with inflation. Send me a DM on Twitter or shoot me an email telling me all about it!
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This is so interesting. I wonder what commodity I’m overlooking that could help me hedge inflation…