Planetdrum6

Kraft Foods: Buffett's Commodity Prediction

I agree with you, Eric, on Tobacco, Spirits and (mostly) Natural Gas. The first two have the wonderful wide moat of addiction protecting them, a la Peter Lynch.

I don't agree on the Pharma parallel (though certainly a big generic drugs producer should also act as a great inflation hedge barring congressional meddling...). Branded consumer staples are vulnerable to "trading down" in tough times, but if the relative gap between premium brands and value brands stays the same in an overall rising price environment, the impact should be muted. Your comment about the $5 cereal vs the $8 cereal illustrates this. In an $8 cereal world, milk would cost $10 a gallon and the median US income would be $65K/year. Everything would stay relatively in line, and brand-buyers would just keep on buying brands.

Of course if food prices rise but wage levels don't, you have a very good point. I just don't think that will happen long-term. And anyway if it does, KFT's share price is low on my list of worries -- at least somewhere below finding a second (or third) job...

Kraft Foods: Buffett's Commodity Prediction

Yeah, the "miraculous trick" up Kraft's sleeve is simply to raise prices. If overall food price levels are going up, Kraft should be able to pass that on. After all, consumers are paying more for everything else at the grocery store too.

This mitigates the margin erosion that's priced in to the shares today. Buffet (and anyone else who takes a moment) is smart enough to know that either commodity prices will drop or Kraft will raise prices under cover of overall consumer price inflation. In any case, they aren't just going to grin and bear it until their margins go negative...

Basic consumer staples are a great inflation hedge when the usual hedges (real estate, gold, oil) are probably overpriced heading into crunch time.