Michael Brush: Why food bills are heading higher

Company Focus11/16/2010 5:06 PM ET

Why food bills are heading higher

The cost of a wide range of commodities has been soaring and will likely keep rising. You can't fight it, but with some smart investing moves, you can profit from it.

By Michael Brush
MSN Money

As if the job market weren't bad enough, we're all going to have to cope with higher prices for everything from cereal and coffee to clothing and beer.

The reason: a phenomenal spike in agricultural commodities this year -- from cotton and corn to sugar and wheat -- is making its way to store shelves. General Mills (GIS, news, msgs), Unilever (UN, news, msgs), Nestlé, McDonald's (MCD, news, msgs) and Domino's Pizza (DPZ, news, msgs) all recently cautioned that price hikes are around the corner.

In fact, you may be seeing them already -- and you're going to see more.

A recent survey of prices at Wal-Mart (WMT, news, msgs) found the cost of Wonder Bread, Eggo waffles and Hershey's syrup advanced 14%-25% in the past two months.

A basket of 86 items, mostly food, was up 0.6% in the past two months, according to the research group that conducted the survey, MKM Partners.

That may not seem like much.

But it spells significant increases if the price hikes continue -- which seems likely given the global trends driving food prices higher.

The big trends: a rising middle class in emerging economies that wants to eat better; weird weather patterns around the globe; the growing use of ethanol to fuel vehicles; and a shrinking dollar that makes commodities look cheaper.

"Agricultural prices are going to go higher, and much higher over the next decade or two," predicts famed investor Jim Rogers, chairman of Singapore-based Rogers Holdings.

Sounds painful, right? But as investors, we have a way to ease the discomfort: Buy the trend and make money from it. Here's how.

A long-term trend

First off, investors who want to buy agricultural commodities now should know that, after such a big run-up, there could be a correction over the next few months. Signs of more farmland coming online or better weather conditions could spark that pullback.

But Rogers is worth listening to about the long-term trends because he's been studying commodities and getting the calls right for years. As he has predicted, the prices of agricultural commodities from sugar and cotton to corn, wheat, soy and coffee all recently hit highs not seen in years, if not decades. "We are still very much in a structural bull market, which will play out for another five or 10 years," agrees James Dailey, the portfolio manager of the Team Asset Strategy Fund (TEAMX).

Investors can jump in by buying exchange-traded fund or exchange traded notes designed to track the price of commodities, like Elements Rogers International Commodity Agriculture ETN (RJA, news, msgs), right now, then wait for pullbacks in the coming months and buy more.

They can also play this trend with stocks; I'll have names in a minute.

First, let's look deeper into the reasons experts cite to explain why agricultural commodity prices will keep rising (albeit with plenty of volatility along the way).

1. The global middle class wants good eats

The U.S. and Europe have fueled growth in emerging economies for decades by purchasing lots of goods and natural resources. That's created a rising middle class that expects to eat better -- which often means more steak, pork and hot wings. Cows, pigs and chickens consume a lot of grain, so this trend pushes up demand and prices.

"We helped industrialize the emerging markets, and we moved a lot of people out of poverty into the middle class," says Jerry Jordan, the manager of the Jordan Opportunity Fund (JORDX). "Now they are consuming more grains either directly" or as food for livestock.

That rising demand is outstripping the ability of farmers to produce more food through productivity gains alone, straining supplies and driving up prices, says Dailey.

2. Lousy weather hurts crop yields

Blame it on global warming, a rise in the ocean temperatures, sunspots or just bad luck, but the weather has taken a rough turn of late.

Drought in Russia and the Ukraine, dry weather in Brazil, floods in China, Thailand and Pakistan, typhoons in the Philippines, heavy rain in Canada and a hot summer in the U.S. have all made it harder for farmers to grow rice, wheat, corn, soy, sugar and other commodities.

A poor harvest in Russia has the country banning cereal exports for fear of inflation and food riots. Moves like this only drive international commodity prices higher. "You are going to see this more and more," predicts Jordan, of the Jordan Opportunity Fund.

3. Alternative-fuel demand sops up corn and sugar

Thanks to federal mandates, about 37% of U.S. corn this year will go to ethanol production, says Joseph Dancy, manager of the LSGI Technology Venture Fund. That's up from 20% as recently as 2006. "The U.S. is the world's largest corn producer and largest corn-exporting country, so this has a big impact on supply," says Dancy.

Last month, the Environmental Protection Agency approved a 15% ethanol blend in gasoline, which will up demand for corn even more.

4. A declining dollar drives up commodity prices

Meanwhile, the Fed keeps creating more money to try to spur growth. It may be what the economy needs, but investors see it as another reason to worry about the U.S. So they're selling the dollar, lowering its relative worth.

Because commodities are priced in dollars, this makes them look cheaper around the world and drives up demand. Consider, too, the flip side: If the Fed's moves work and spur growth, commodity prices will rise as growth increases demand, says Rogers. So prices go up either way, he believes.

Here are three ways to play this trend.

Continued: Play No. 1: Buy the commodities

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50Comments
11/22/2010 1:48 AM
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i thinks the food price keep rising is related to human being moves.
11/21/2010 9:54 PM
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wordfrominside,

 

Good job. You just described...weather. Now, what shall we do about it? Starve ourselves, live in abject poverty, and travel by foot in order to save some mice? Because we're certainly not going to change our climate. It's quite arrogant to think that we could.

 

But let me ask you this:

 

If we've been having some of the worst weather in a century, doesn't that mean that this kind of weather happened a century ago? Ponder the implications of that for a while and get back to me.

11/21/2010 6:34 PM
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More farms. More food. Can't eat $600,000 house. Just sayin.
11/21/2010 3:04 PM
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Rational Liberty

 

I am going to let you in on something that people who live big urban centers don't really notice: changes in the seasons.

 

I have lived in my current location for 20 years. What I have noticed is that spring comes TWO MONTHS earlier than it use to (in one year, it arrived in FEBRUARY). I also noticed that it's almost Thanksgiving and winter has NOT arrived yet; it's about a month late. During the past few summers, we had some really odd weather: one year, we had these terrible storms unlike anything I have seen in 20 years  (think Category 1 hurricane winds in the middle of a thunderstorm - the rain was sideways). The following year, we had this deep freeze in the middle of spring.

 

Climate change is real if you bother to notice. I have been keeping track of extreme events around the world going back to 1995 and they have become more common. The fact that we had this really long period without a single big hurricane hitting N America alone is outside the norm. The changes come from all over the place and they show up in different ways: how about central Texas and Atlanta having one of the longest droughts they have had in over a century. How about record floods in the MidWest during the 1990s (remember those?). Or the record heat weave that killed thousands in Europe several years ago? Russia (!) just had one of the biggest heat waves it ever had this past year (90 something in MOSCOW).

 

I think most people are barely aware of what's going around them (let alone what's happening worldwide).

 

11/21/2010 8:12 AM
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Most people are unaware of what is actually involved in farming. Some don't even know that farms are where food actually comes from. They believe that food, somehow, by some kind of magic, ends up on their grocer's shelves. There are many more people that think that farming is an easy thing to do. That all that's involved, is plopping a seed in the ground and coming back a few days later to harvest the crop. There is a widespread belief that farmers are a pretty dense lot of folks that have a rough time figuring out how to tie their shoes.

 

The farmer is humble, because the farmer must know so very much about so many things that a lifetime of learning is not enough. 30 years of depressed commodity prices have left us with far fewer farmers and thus a smaller base of knowledgeable experienced farmers.

 

Going forward expect higher prices for food. Farming is not easy. The capital investment required to start is just the tip of the iceberg. In order to make a return on that investment, the farmer must have the willingness to put in the effort and have the know how.   

 

 

 

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Free loading banks and wall street are what's really breaking middle America. Of course blood sucking insurance companies help.These three groups produce nothing and take mountains from our economy.
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We already have double more population than our earth can sustain for long. No way can we expand our life span significantly. Look at California: Every system: legal, educational, medical, criminal etc. all overloaded. With all these people and the gap in wealth growing we are heading for disaster. A good spurt of inflation may be the last straw.
11/20/2010 9:23 PM
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So, the lesson to be learned is this:

 

1. We can prevent a massive increase in corn prices if we stop using food as fuel. That shouldn't be hard to do considering there are vast oil,natural gas, and coal reserves that can provide plenty of fuel - in addition to nuclear, hydroelectric, and even the not-so-viable energies like wind and solar. How stupid have we become that we would rather raise our food prices instead of lower our energy prices?

 

2. Devaluing our dollar in order to "prevent deflation" or artificially prop up the economy (which never works) only makes commodity prices rise - because our money is worth less. Yeah - it's pretty stupid that I have to point out something so remedial, but that just goes to show you how blatantly incompetent our government and economic "scholars" are today.

 

3. Anthropogenic global warming hypotheses are a joke. (And I'm still waiting for all of those massive hurricanes we were supposed to be seeing since Katrina over five years ago. They never happened...go figure.)

 

So, what can we do to help relieve the inflationary pressures on our currency and food prices? Anyone who can tell me will win a prize. And if they can convince the government to implement that plan, they may just win back their own prosperous future.

11/20/2010 11:41 AM
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diditonce

 

They DO include food and energy prices in the CPI but the central bankers in the U.S. (believe it or not, central bankers in other countries still give a sh!t about their own citizens; it is only the American system that has been bought and paid for) seem to only care about core CPI (which excludes the food and energy components from the calculations).

 

This basically proves who they care about: The CPI represents what the consumer spends money on (I am going to ignore for a moment the issues in the way CPI is computed). The core CPI, on the other hand, is a proxy measure of what profits companies can make on the products they produce by raising prices. So, the bankers care about who they loan money to but don't care at all what happens to consumers.

 

11/20/2010 11:24 AM
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Haruka8500

 

Here's the irony: the taxes collected by all levels of government is lower and the deficits are higher because there is lower domestic demand and no hiring reducing economic activity (most corporate profit reports show that their profit growth is mostly international). So pick your poison: cut your margins and hire someone so that there is more payroll and consumer spending recovers or you have to pay the taxes to support those who cannot find a job and support themselves.

 

Just remember where all of the money went: into real estate (trillions of dollars of homes, condos, office complexes and strip malls that now sit empty and rotting away) and into the pay and bonuses of the financiers (now sitting in overseas tax havens and megamansions) instead of into the things the nation really needed: fixing the schools, providing an affordable college education, repairing our inadequate and aging roads, bridges, airports, sewers, water systems and power grids. Since we have been in this pit, the very people who were in the center of this mess still have not paid back their share of the costs associated with that bubble because it sits out of reach of American authorities.

 

I am not rationing anything until we get our money back from these people. I don't think we should have to suffer for bad decisions that I personally was not involved in making or abetting.

 

11/20/2010 11:14 AM
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Hey, JJ, how do you reconcile the claim that 37% of the corn food crop is being cannibalized for ethanol when producers of ethanol have been losing money for the past 2 years and many have already gone bankrupt?

 

Even the subsidies were not enough to hold them up when oil prices dropped off from their bubble highs in 2008. Ethanol was pushed as a cheaper substitute for gasoline but prices are now much lower than the peak so there is less demand for any gasoline substitute. The fact that global demand for corn drove prices for the feedstock up made things even worse for the ethanol industry.

 

Most of the recent price spikes in some mainstay food crops have been due to unexpected bad weather in Australia and Russia. Price volatility in the commodity markets are NORMAL. Who knows - maybe next year it crashes if the weather normalizes and/or farmers react by planting even more of the high-priced crops.

 

11/19/2010 5:44 PM
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 Time for us to face the realites...

11/18/2010 9:08 AM
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I have one word for people.....RATION! This is an old word, but prior Generations adhered to this thinking. Back in the day, Plate size was 9" in Diameter. Today's Plate is more like 14" in Diameter. I agree with buzzybucks that based on a Global Economy trying to feed 6 Billion people, and if crops were to take a hit based on weather, you will see food shortages coupled with high prices. If this scenario sounds like Science Fiction, then oh well, but just sit back and wait. When people are stealing for food, this is when it will get interesting.
11/17/2010 6:43 PM
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I run a small farm on the side and will tell you that the small farmer has had it rough. It has been tough for so long that many growers just gave up. This has led to under production and higher prices. The world has a smaller food supply and a larger population each day. The farmer will get his due soon.  

11/17/2010 6:05 PM
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We need new money now. Not the same old dollar around and around then out of the country for good. Oil, coal, timber and mining , new money out of the ground.

Also feed your self by hunting if you can. 

11/17/2010 4:04 PM
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Those of us who buy mass quantities of food commodities for processing have a saying.

 

"Nothing lowers high prices like high prices"

 

In the short term farmers always over plant when prices are high thereby reducing prices after the next harvest.

11/17/2010 3:14 PM
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If you voted for Obama you are getting what you asked for. He said in his speeches as a senator, that we needed to lower the standard of living in the United States in order to increase the standard of living in other parts of the world. He has Bernake printing billions of dollars, in order to devalue our money, thus higher prices for everything. Obama wants to increase the price of fuel with his cap and tax program, which will also increase the price of everything dramatically. I know cap and tax will not go through, however, he is still having the EPA impose restrictions, so in effect he is getting cap and tax through the back door. Obama lifted the embargo on oil drilling in the Gulf of Mexico, but has he allowed the EPA to issue permits so that drilling can begin again? Get ready for higher prices and taxes thanks to Obama, our standard of living is going to drop.
11/17/2010 2:59 PM
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Printing money with nothing to back it up is NOT what this country needs to spur growth.  It's just worthless paper if we have nothing for it to fall back on.  And if corn and sugar is being sopped up by companies to make alternative fuel... the STOP letting them use our food source for fuel!  Come on people.  We should be looking for alternative sources for oil yes, but if it costs us our food supply and plunges us deeper into a poor economy then it's not worth it right now.  Also, TAX CUTS are an important thing right now.  We need them so companies can stay open and supply jobs for the people.  If someone makes enough money to run a business but has to pay almost half of that in taxes so lazy people don't have to work, how are they supposed to supply a paycheck?  Get your heads out of the sand and take a look around you.  It's going to hit us hard and you all won't even see it coming.
11/17/2010 1:58 PM
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Not all things are good to profit on. This will drive prices up even more and hurt the people that can least afford it.
11/17/2010 1:36 PM
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This is usual nonsense. Prices are *DOWN* from 2008 for all commodities. Wheat, Corn, etc are no where near their 2008 peaks.

 

Yet prices are going higher than they were in 2008? Typical. Costs drop for inputs massively, they maintain the same prices, costs rise later, they increase prices.

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