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Rising food costs became a problem in the middle of the past decade for the first time since the inflation-ridden 1970s, with unrest and food riots appearing in poor countries in Africa, Asia, and Latin America by 2008. The situation cooled down with the onset of the global financial crisis, but it is once again a serious issue as prices for corn, wheat, soybeans, and rice, among other foodstuffs, have skyrocketed. Corn, for example, is now nearly $7 a bushel, after doubling since last summer. For many years, the price of corn had averaged a little over $2 a bushel.
 
A few underlying causes for the rise in demand have not been offset by conditions that would increase supplies. More mouths to feed is one factor driving up food prices, as the world’s population is 80% larger than it was 40 years ago. There’s also the multiplier effect of rising incomes in places like China and India, which has led to greater meat consumption. It takes several pounds of grain to produce a pound of beef or pork, significantly boosting consumption of livestock feed. The third main factor behind rising food prices, as we see it, is government policy promoting biofuels. Estimates are that one-quarter of the United States corn crop is now for use in ethanol. That creates competition for acreage, particularly when oil prices are high. Meanwhile, on the supply side, technological improvements to increase crop yields and control diseases tend to come in small increments.

Let’s not forget to give Mother Nature her due. Every farmer has felt the havoc the weather can wreak on a harvest. Droughts, floods, and frosts in a number of key producing regions have been especially troublesome over the past year, pushing grocery bills higher. The temporary nature of weather calamities is little consolation to hungry people, though. It is estimated that 10%-15% of the world’s population is undernourished.
 
The need for more food has created opportunities for investors in areas such as seed technology, fertilizers, and farming equipment. Stocks such as Monsanto (MON), Mosaic (MOS), Potash (POT), AGCO (AGCO), Caterpillar (CAT - Free Caterpillar Stock Report), and Deere (DE) have benefited as a result. On the other hand, Wall Street has become more cautious toward shares of food processors and food retailers faced with rising ingredient costs. Those include Kraft (KFT - Free Kraft Stock Report), ConAgra (CAG), Kellogg (K), PepsiCo (PEP), and Panera Bread (PNRA), among others.

Low grain inventories, particularly for corn, are clearly putting upward pressure on global food prices. The trend of demand outstripping supplies is in place, too, as the world gets more crowded. Indeed, its population of just under seven billion people could potentially rise to nine billion by 2050. The crisis has been showing up in a powerful way, with long-standing regimes in Africa being overthrown, unrest in Pakistan, Bangladesh, India, Argentina, and the potential for rioting in hard-hit regions. The near-term ebb and flow of events is tricky for investors, though, since stock prices already reflect events to this point. That means it could take another weather-related event to push agriculturally related shares higher in the coming months.

 


At the time of this article, the author did not have positions in any of the companies mentioned.