Rising Global Food Prices: Trading Guns for Butter

In the spirit of quarterly updates, it's time to take another look at food prices. When we last checked in with the supermarket - right after the New Year - we expressed shock and dismay at the rise in staples like eggs and milk. I mean, eggs had risen 38% in just 15 months! Imagine!

Of course, that ain't nothin' compared with the last few months.

Food prices are rising everywhere - which comes as no surprise to anyone following agricultural commodities. The past few months have seen "beans in the teens" and wheat over $12 a bushel. Corn hit $6 a bushel last week and rice is up over $20. With all of these commodities at or near record highs, food producers have no choice but to pass along their rising costs to the consumer.

Behind the prices are the usual suspects. As always, it's supply and demand. Increased wealth in developing nations like China and India translates into higher consumption of meat, grains and wheat. The growing popularity of biofuels to offset energy costs and global warming sets up the competition between crops for food and crops for energy production. Global stockpiles of most grains are at all-time lows, supporting the higher prices. And supply hasn't been rosy either: half the world seems to be suffering from droughts, which cuts harvest yields, and the other half is dealing with the opposite problem - Bangladesh is still reeling from floods and typhoons, and rain could delay corn plantings here in the U.S.

And of course, there's always oil. Agriculture and crude oil go hand in hand, with high oil prices translating into higher transportation and fertilizer costs. And where do the effects of all these trends ultimately have an impact? Your grocery cart.

At Home ...

Here in the U.S., an informal survey conducted by the American Farm Bureau every quarter, shows a basket of 16 common grocery items increasing 8% between the fourth quarter of 2007 and the first quarter of 2008.

	Q4 2007	Q1 2008	change	% change
flour, 5lb bag	$ 1.70	$ 2.39	$ 0.69	41%
cheddar cheese, 1lb	$ 4.10	$ 4.71	$ 0.61	15%
corn oil, 32oz	$ 2.43	$ 3.01	$ 0.58	24%
eggs, 1 doz	$ 1.61	$ 2.16	$ 0.55	34%
vegetable oil, 32oz	$ 2.25	$ 2.63	$ 0.38	17%
mayonnaise	$ 2.92	$ 3.14	$ 0.22	8%
potatoes, Russet 5lb bag	$ 2.29	$ 2.47	$ 0.18	8%
white bread, 20oz loaf	$ 1.62	$ 1.78	$ 0.16	10%
apples, 1lb	$ 1.27	$ 1.40	$ 0.13	10%
whole chicken, per lb	$ 1.28	$ 1.37	$ 0.09	7%
ground chuck, per lb	$ 2.69	$ 2.73	$ 0.04	1%
bacon, per lb	$ 3.35	$ 3.35	$ -	0%
whole milk, 1 gallon	$ 3.91	$ 3.81	$ (0.10)	-3%
pork chops, per lb	$ 3.39	$ 3.31	$ (0.08)	-2%
toasted oat cereal, 9oz box	$ 3.05	$ 2.97	$ (0.08)	-3%
sirloin tip roast, per lb	$ 3.85	$ 3.80	$ (0.05)	-1%
Basket Total	$ 41.71	$ 45.03	$ 3.32	8%

The media is full of stories of how Americans across the country are dealing with higher grocery bills - from shopping at discount grocers (Wal-Mart looks like a big winner here) to clipping coupons, to eating less meat. American consumers are feeling the pinch of higher food prices.

... and Abroad

From a GDP perspective, the U.S. has it easy in weathering food inflation. Food is only 7% of overall economic consumption. But in Asian economies like China, India and Vietnam, food costs account for anywhere between 30­‒50% of overall consumption. Every uptick in food prices has a vastly more significant effect on local economies than here at home. United Nations records show global food prices rising 35% in the past year, with grain up 42% and dairy up a Marge-let's-buy-a-cow, eye-popping 80%. The world's poorest countries are facing very real fears of food shortages, and even the not-so-poor are acting to ensure food supplies and attempt to rein in food inflation.

Here's just a sampling:

Saudi Arabia cut import taxes, including removing its wheat tariff and lowering others on common foodstuffs such as vegetable oils, dairy products and poultry.

India removed tariffs on edible oil and corn to increase imports and banned the export of all rice except basmati. It has also taken steps over the past two years to increase its grain stockpiles - think strategic reserves - through increased imports.

Vietnam, the world's third-largest rice producer, is planning to cut its rice exports by 11% in an attempt to ensure its own "food security."

Indonesia has reduced import tariffs on foodstuffs as a check on agflation.

Bangladesh banned the export of soybean and palm oils for six months last month.

The Philippines are cracking down on those who seek to profit from tight rice supplies, with rice hoarders facing possible life imprisonment.

And finally, the winner of the most unusual propaganda campaign goes to China, which besides freezing prices of meat, eggs and some grains, also ran pictures of its strategic reserves of food stuffs in local newspapers as an attempt to boost consumer confidence.

These are dramatic moves, and they're likely just the first step.

Looking Forward

Everyone from biofuel firms to the United Nations thinks that high prices are here to stay, at least for a few years. This is one case where it's hard to find the contrarian argument, so we're taking it as gospel for the time being.

The challenge for investors is to find those firms most likely to profit in an environment where those prices will inevitably curb consumption. These might be retailers like Wal-Mart, but it's important to listen to what the food producers themselves say about how they weather these markets. Food isn't like oil - you can't assume that the food maker will rise like the oil companies have in the face of price spikes.

The second challenge is to pay attention to the big moves. Food is the most emotional of goods. The world is already facing a hidden and horrific epidemic of hunger and poverty - some 25,000 people die each and every day from hunger. But most of the world's politicians haven't had to face food scarcity head-on. As the problem gets worse, expect more frequent and more dramatic action on behalf of the world's largest food consumers and producers. It's quite possible that we could see huge shifts in international trade policy over a very short period of time, and over something even more volatile and nonoptional than oil.

After all, guns have been in the limelight for a long time. This time it's the butter that's headed for center stage.

Links:

Global Agflation coverage, Reuters

Retail Food Prices Up at Beginning of 2008, American Farm Bureau March 27, 2008

Tensions rise as world faces short rations, Reuters March 31, 2008 12:36 a.m. EDT

Food Price Crisis To Worsen ABN Newswire, April 4, 2008

Comments

[Georealist]

So...where's the beef? No real analysis...or direction. A article that's not an article..This is really getting a little disappointing...Alpha prints rubbish from people unwilling or unable to give an investible idea.......stick your neck out a little Hard Asset whatever....

[proseadvocate]

I thought the article was clear. Only a man without a brain could not see the point. Inflation is much greater than what our Government tells us it is. Kinda like the stories the wire houses tell us about the safety of their crap loan portfolios. The beef is costing more, so maybe you should buy ag funds. Duh

[jimbomo]

I view this as information as a harbinger of bad things to come for emerging economies. This quote is telling:

From a GDP perspective, the U.S. has it easy in weathering food inflation. Food is only 7% of overall economic consumption. But in Asian economies like China, India and Vietnam, food costs account for anywhere between 30­‒50% of overall consumption. Every uptick in food prices has a vastly more significant effect on local economies than here at home.

Added to this is the upsurge of energy costs that will also be a drag on poorer economies.

So, the investment possibilities are - short equities in emerging economies.
EOM

[Marty FromNorth Dakota]

Here in the U.S. ranchers are selling their herds because of the high price of corn feed. At some point, they'll be sold down and will have to resume feeding to fatten. It is at this point that prices for a steak dinner will go ballistic.

Most people in emerging countries eat rice with a little vegetable for flavor. Some are moving up to the middle class and these want a bit of meat on their rice.

It's between these two contrasts we are heading. I'm investing in the notion that Americans will be cutting back radically on meat while China, India, et. al. buy up our grains with hard currency and eventually gold.

Short pet stores, weight loss, diabetes, restaurants; go long on grocery stores: WM is grocery now and look at the price going up.
Also short scooter makers who haul layers of blubber with small heads on top. "Our way of life" as Bush calls it, is about to change. Some knew Bush would run the government the same way he ran his failed businesses but voters couldn't see past Karl Rove.

[ericinNE]

Ah, Mary. Your Democrat stripes really came through w/ that last line/diatribe. Firstly, Bush doesn't run the govt., the Congress does. And the Congress is comprised of primarily spineless toadys, on both sides, that do as their told by lobbyists, the most powerful of which is the banking sector. Secondly, the most likely economic scenario is due to both Reps and Dems unwillingness to face reality, and institute an energy policy that could have already put us in a position of near energy indepencence. When nothing changed after the late '70's oil embargo, rationing, etc., it should have been clear that the tough choices were never going to be made by the politcal leadership of either party. But let me guess, you're going to vote for whatever Dem candidate, regardless of their demonstrated propensity for socialist programs and politically expedient pandering, right? I can't wait till Obama is elected, and can short the market across the board, with an almost 100% probability of great returns for the next few years.