The prices of some basics, including wheat and rice, have risen by more than a quarter and are near historic highs. As your budget tightens, these stocks benefit.
Recent headlines tell the story of a global spike in food prices. In the last few weeks, we've seen riots in Algeria sparked by the cost of sugar and wheat. Mexico's government bought corn futures to hedge against rising tortilla prices. Indian prime minister Manmohan Singh was forced to arrange onion imports from traditional enemy Pakistan. In a visit to a supermarket in Inner Mongolia, Chinese premier Wen Jiabao promised shoppers that the government will control food price inflation now running at better than 11% annually.
It sure sounds like we're headed back to the bad old days of 2008, when soaring food prices sparked riots around the globe. According to the food price index kept by the Food and Agriculture Organization of the United Nations, the prices of traded food staples such as wheat, corn, and rice climbed 26% from June to November and are near the historic highs set in 2008.
What the world is seeing isn't an anomaly, in my opinion. The peaks of 2008 and 2010 aren't unusual events caused by a coincidence of bad weather and terrible (but common) government decisions to hoard key grains behind export bans. Those peaks are indeed extreme, but the long-term trend in food prices is upward. It's the dip from the highs of 2008, as global consumers tightened their belts in response to the Great Recession, that's actually the anomaly.
Absent a return to global recession, I think the upward trend in food prices is going to continue. The forces pushing prices higher are simple and massive, and the policy responses from governments that might temper the trend are too limited. If you're a long-term investor, the rise in food prices is one of the safest trends you can invest in for the long term.
A Good Food Stock Is Hard to Find
It's also one of the most frustrating trends, because of the difficulties in finding good stocks positioned to take advantage of rising food prices. Eliminate those that don't trade publicly or in the United States and the number gets even smaller. For example, one of my favorites is Marfrig Alimentos, a Brazilian processor of beef, pork, chicken, and lamb, as well as frozen vegetables, prepared meals, and pasta. But while volumes are above a million shares a day in Brazil, the stock (MRFG3.BZ) trades hardly at all on the US over-the-counter (OTC) market.
But I think you can expand the universe—a bit anyway—if you go back to the root causes of rising food prices.
Demand for staple grains, for example, is forecast to rise by 2% in 2011. Where's that demand coming from? A larger global population is certainly contributing, but rising global incomes also play a role. As incomes rise, even modestly, people clamor to eat more meat. Turning grain into pork or chicken or (corn-fed) beef is a very inefficient way to produce protein. And, at least in the United States, there's further competition for grain for energy production. The International Monetary Fund (IMF) estimates that 70% of the increase in corn prices in 2008 was due to demand from ethanol production.
The solution would seem simple: Grow more food. But increasing the food supply isn't easy. First, the world isn't producing any additional good farmland. In fact, we're losing farm acres every year to causes that range from desertification to urban development. Second, while increasing the productivity of much of the world's farmland is certainly possible, we've got a mismatch in much of the world between the cost of the inputs that would raise productivity—better seeds, more fertilizer, better irrigation—and the ability of poor farmers to pay for them. Third, many of the cheapest and easiest methods for raising productivity have hit real limits, given the absence of investment capital. For example, cheap forms of irrigation have depleted the water table in many farm areas of India, while at the same time adding near-toxic levels of salts from fertilizers to the soil. That situation is certainly fixable, but deeper wells, drip irrigation, and soil restoration all require investments beyond the capacity of most of the area's farmers.
“Global Weirding” Isn't Helping Matters
Fourth, global climate change is making weather less predictable. For example, it looks like what I think is best referred to as "global weirding"—and not global climate change or global warming—is in the process of changing the patterns of South Asia's monsoon rains and the oscillations between La Niña and El Niño patterns in the Pacific.
To think about how this all plays out for investors, break it into two parts. First, the rise in food prices means that farmers will earn more income (however, inequitably distributed in the world) that they can then reinvest in growing more food. Second, consumers—and the companies that supply them—will be looking to find ways to cut their cost.
So which companies prosper as farmers have more to spend?
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