Higher food prices are on the way

By Jim Jubak

Grain prices have plunged in the past year, and that's been great for supermarket shoppers but lousy for agriculture-related stocks.

Wheat that sold for $474 a ton a year ago was going for just $243 as of March 9, according to the International Grains Council. Corn prices have tumbled 29% since last March, and the price of soybeans has plunged 53%. Rice has been the best performer, but even that's down 11%.

So the boom in agricultural commodities that produced huge profits for investors in stocks such as Deere (DE, news, msgs), Potash of Saskatchewan (POT, news, msgs) and Monsanto (MON, news, msgs) is over, right?

Whom are you kidding? What we're seeing is a mere pause in a trend that's likely to run for decades. And moreover, it's a pause that is likely to end this year. Food commodity stocks are about the only equities that I'm looking to buy "now-ish." I'm not saying "now" because I don’t think the rally that began March 10 will hold. It's a rally in a continuing bear market, and I'd rather buy into the next downward move rather than into this temporary upswing. But I'm definitely looking to buy food stocks in the next six months or so.

Go with the grain

The rising demand for food, the increasingly tight supply and the consequent climb in price of food-related stocks are among the long-term trends I lay out in my new book, "The Jubak Picks." This sector is also one of three that I flagged as possible buys in my Dec. 30 column, "10 key trends for investors in '09."

(The other two that looked like potential buys this year were bets on rising inflation and on the search for stability in a world of volatile markets and economies. I still think those are good bets for the second half of the year, and I'll have more on both topics later.)

In my book, I summed up the argument for a decade-long climb in the price of food and food stocks this way:

• For 30 years, beginning in 1974, the real price of grain fell. During those three decades, the price of corn, adjusted for inflation, fell 75%. The real price of wheat fell 69%.

• No more. The trend has turned and is picking up momentum.

• The 2007-08 harvest-to-harvest year was the third in a row in which the world consumed more grain than it had harvested. In fact, 2007-08 was the seventh of the past eight years when consumption outstripped production.

• As a result, we're on the verge of one of the longest, most sustained periods of growth in farm incomes since the late 19th century. And higher farm incomes mean more money spent on everything from fertilizer to high-yield seed to farm equipment to dry-bulk cargo ships.

As an investor, I concluded: "This is one wind that you must put at your back. Food is the new oil." (Please note that throughout this column I'm using global grain production and consumption as shorthand for trends in food production and consumption in general. Grain consumption, for example, closely tracks increases and decreases in meat production.)

Up, up . . . and down?

As investment advice, that was dead-on through 2007. That year, for example, shares of fertilizer producer Potash of Saskatchewan climbed 201%, shares of seed and pesticide market leader Monsanto were up 115%, and shares of farm equipment maker Deere climbed 100%.

But the sector went into reverse in 2008: Potash shares fell 49%. Monsanto dropped 36%, and Deere plunged 59%.

• Talk back: Are higher prices a problem or investing opportunity?

What went wrong?

The rate of increase in global grain consumption fell because of the global recession. Grain consumption didn't fall, mind you. It's just expected to grow more slowly. Grain consumption, again according to the International Grains Council, grew 3.4% from June 2007 to July 2008. Early forecasts put the increase for 2008-09 at 2.9%. Current forecasts show an increase of just 2.3% to 1.72 billion tons.

At the same time, the 2008-09 grain harvest looks like it will set a record at 1.78 billion tons. That's forecast to put global grain production ahead of global grain consumption and will add about 60 million tons to grain stockpiles.

Continued: A little less price risk

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