How to Win the Coming Food Fight

12/08/2010 12:00 pm EST

Focus: ETFS

Michael Brush

Columnist, MSN Money

Michael Brush of MSN Money suggests agricultural investments to offset the rising cost of groceries.  

As if the job market wasn’t bad enough, we're all going to have to cope with higher prices for everything from cereal and coffee to clothing and beer.

The reason: a phenomenal spike in agricultural commodities this year—from cotton and corn to sugar and wheat—is making its way to store shelves. General Mills (NYSE: GIS), Unilever (NYSE: UN), Nestlé (NSRGY), McDonald's (NYSE: MCD), and Domino's Pizza (NYSE: DPZ) all recently cautioned that price hikes are around the corner.

In fact, you may be seeing them already—and you're going to see more.

"Agricultural prices are going to go higher, and much higher over the next decade or two," predicts famed investor Jim Rogers, chairman of Singapore-based Rogers Holdings.

Several trends are driving food prices higher: a rising middle class in emerging economies that wants to eat better; weird weather patterns around the globe; the growing use of ethanol to fuel vehicles; and a shrinking dollar that buys less grain than it used to.

But as investors, we have a way to ease the discomfort: Buy the trend and make money from it. Here's how.

First off, investors who want to buy into the agriculture boom should know that, after such a big run-up, there could be a correction over the next few months. Signs of more farmland coming online or better weather conditions could spark that pullback.

Investors can start nibbling now then wait for pullbacks in the coming months and buy more.

The cleanest way to play the rising prices is to buy the commodities themselves, suggests Rogers. That way, there's no management in the mix to muck things up for you, as there is with stocks.

Appetizing Propositions
Three exchange traded baskets to consider are the Elements Rogers International Commodity Agriculture ETN (NYSEArca: RJA), the iPath Dow Jones-AIG Grains Total Return Sub-Index (NYSEArca: JJG), and the PowerShares DB Agriculture ETF (NYSEArca: DBA).

The stocks of several companies that help farmers look like solid plays on higher commodity prices. High on the list of many experts are companies that produce potash used as fertilizer, like Mosaic (NYSE: MOS), Potash of Saskatchewan (NYSE: POT), and Intrepid Potash (NYSE: IPI). CF Industries (NYSE: CF), which produces nitrogen used in fertilizer, should also benefit, along with grain producers Archer Daniels Midland (NYSE: ADM), and Bunge (NYSE: BG).

Meanwhile, investors have had doubts about the seed company Monsanto (NYSE: MON) recently because initial performance of a new line of seeds was spotty. But Citigroup analyst P.J. Juvekar says Monsanto's track record suggests the line will do better as time goes on. Juvekar has a $72 price target on the stock, which recently traded below $62.

[Commodity bull Eric Roseman is also high on Monsanto’s potential, while Ian Wyatt recently recommended an ETF that includes Monsanto as well as other leading agricultural suppliers. With global food stores on the skimpy side, farmers will need all the help they can get to keep up with demand—Editor.]

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