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Now the really bad news is that we might actually have been lucky in the past few years, as global warming has lengthened growing seasons in the American Plains, sometimes called the Saudi Arabia of corn. BMO's Coxe notes that the U.S. Midwest has enjoyed 17 straight years without significant crop failure, the longest winning streak on record. If this fortunate run ends soon, we'll likely face a worldwide crisis.
Some researchers, including climatologist Elwyn Taylor of Iowa State University, believe it could happen this year, as La Niña conditions are emerging at a time when the Midwest has become vulnerable due to a drought creeping up from the South.
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Food prices are already way up in America but not as much as feed prices because manufacturers, processors and retailers such as Wal-Mart Stores (WMT, news, msgs) have found ways to hold the line by cutting expenses. But they can dam up the flood of food inflation for only so long. In March, Procter & Gamble (PG, news, msgs) announced it was raising prices on many of its foods products, including Folgers coffee. J&J Snack Foods said it would lift prices by as much as 12% to offset costs, and local newspapers have been rife with stories about pizzerias both raising prices and cutting back on crust thickness and cheese quantities.
Joseph R. Dancy, who teaches law at Southern Methodist University and runs a small hedge fund, lays the immediacy of the crisis directly on ethanol-production mandates in an energy bill recently passed by Congress. The bill, intended to boost America's energy independence, is expected to push as much as 31% of the U.S. corn crop into biofuels production, up from 24% last year. In other words, at the exact moment we most need corn on our plates, it is being funneled into cars. A full tank of gas requires the equivalent of a quarter of a ton of raw foodstuffs, enough to feed one person bread for a year.
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Coxe's solution: As a first step, shut down all ethanol plants immediately. "It's criminal to burn corn for fuel when we are out of food," he said. In a particularly pernicious development, he noted that a big boost in demand for soybeans for use as biodiesel in Europe has driven up the price of palm oil in Southeast Asia, where it is the main source of protein for the poor.
If global famine is one bad crop away, then surely there is an investment angle. On dips, the companies to focus on are mostly the same as I described in my year-opening column, "10 market predictions for a glum '08:" Seed innovators Monsanto (MON, news, msgs) and Syngenta (SYT, news, msgs); fertilizer makers Potash of Saskatchewan (POT, news, msgs), Mosaic (MOS, news, msgs), CF Industries (CF, news, msgs) and Agrium (AGU, news, msgs); tractor maker Deere (DE, news, msgs); and, for exposure to the food futures themselves, the exchange-traded funds PowerShares DB Agriculture (DBA, news, msgs), iPath AIG Agriculture (JJA, news, msgs) and iPath AIG Grains (JJG, news, msgs).
Some additional small caps to consider are equipment retailer Titan Machinery (TITN, news, msgs), irrigation-equipment maker Lindsay (LNN, news, msgs) and processing-machine maker Key Technology (KTEC, news, msgs).
I guess this gives a new meaning to the term "seed capital."
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Bank on big grocery billsOne key way to increase agricultural supply and reduce prices is by improving seed technology. So if you want to profit from rising prices, notes MSN Money's Jim Jubak, your best bets may be seed companies
Fine print
Coxe has published a book summarizing his view of investment bubbles and declines called "The New Reality of Wall Street." . . . To learn more about law professor Dancy, visit his Web site. . . . To keep an eye on commodity futures prices, visit here or here. The Chicago Board of Trade has a great page summarizing the action. The U.S. Department of Agriculture Web site has pages and pages of material to help you get up to speed, such as this one on wheat. . . .I previously wrote about ethanol as bad public policy on Feb. 10 in a blog item and on Oct. 11, 2007, in a column, "Shuck the ethanol and let solar shine." I wrote about the corn boom last April 5 in "Investors bite into the corn rush."
At the time of publication, Jon Markman owned shares of Monsanto, Potash of Saskatchewan, Mosaic, CF Industries, Agrium, Lindsay, Powershares DB Agriculture, iPath AIG Agriculture and iPath AIG Grains.
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