China, Brazil: Cashing In on Higher Food Prices

By Irwin Greenstein

Two of the top emerging markets are grappling with food production and costs - resulting in higher prices in the months to come. The outlook for China and Brazil could portend higher grain prices, giving investors a chance to cash in on a potential rebound.

China’s higher food costs would result from a regulatory change, while Brazil’s food supply is feeling the pinch of tighter credit. In both cases, grain supplies will be affected.

In China, the government scrapped its 11-month interim price control measures on grain and some food products starting from this month after inflation began to drop.

Inflation had taken its toll on Chinese consumers, with food the biggest contributor to lower consumer spending.

For example, in January of this year food prices in China bolted a staggering 18.2% over the previous year as consumer prices rose 7.1%. By April, food prices were up 22.1% over the same period in 2007 as inflation hit 8.5%. By November, China’s pricing controls had curbed inflation to 4% as food prices rose 8.5% percent in October - down dramatically from the beginning of the year.

Now that market forces are back in play, it’s expected that grain prices in particular will begin to rise again. With the government controls lifted, farmers and traders can resume to set market-driven prices without permission from the government.

In Brazil, farmers are struggling to keep up with demand in the face of tighter credit.

A global cash shortage inflames a tough market for Brazilian food producers, already reeling from slumping crop prices and higher costs of farming supplies such as fertilizer.

Soy beans is a major cash crop for Brazil and it looks like production will drop this year — indicating that soy prices could rise on the open markets. Hurting for cash, Brazilian farmers are forced to cut the size of their crops under these hostile conditions.

As grain prices soared during the first half of 2008, Brazilian farmers accrued large debts in anticipation of ongoing increases. But now that the prices of grain and other commodities are dropping, Brazilian farmers are saddled with huge debts that further inhibit their borrowing power.

The problems are expected to contribute to a 2% drop in Brazilian soybean production for the 2008-2009 crop year, according to the U.S. Agriculture Department.

Meanwhile, the world’s population continued to grow, from 4.4 billion in 1980 to 6.7 billion in 2007. The United Nations is projecting an additional 40% increase by 2050, when the population is expected to reach 9.2 billion.

As China and Brazil contribute to higher food prices, this could be a good time for investors to enter the beginning of a longer term cycle.

Comments

[jepittman:]

What, specificly, would you suggest?

2008 Dec 03 10:28 AM

[applesauce:]

DBA, corn, soy beans, wheat, and sugar. Way down and with higher demand and lower production prices of food stuffs will rise.

2008 Dec 03 01:13 PM

[M.R. Henderson:]

Data from the past January is no longer very useful, and mentioning 2050??? With petrol way down and Australia likely back, where is a present catalyst for grain price appreciation in the next year?

Also, regarding China, from where did you source that with "the government controls lifted, farmers and traders can resume to set market-driven prices without permission from the government." I have read and heard the opposite, that Grain prices are being more tightly controlled, have increased a little because the sharp drop in prices this fall made a lot of rural populations violent.

2008 Dec 06 08:52 AM