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.
"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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