Agricultural Stocks: Fatten Up Your Portfolio on Food Price InflationCompanies / Agricultural Commodities Apr 19, 2012 - 10:08 AM GMT
Don Miller writes: For most Americans, the cost of food hasn't always been such a big deal.
For the better part of the last 30 years, food supplies were plentiful and the economy provided enough wealth to keep cupboards stocked.
But my how things have changed since the financial meltdown of 2008. Today, food inflation has more people concerned about the cost of groceries -- and how they're going to pay for them.
Yet for investors, the same food price inflation dilemma presents an investment opportunity that is ripe for the picking.
With that in mind, agricultural stocks are where to look for the low-hanging fruit as food prices keep heading higher.
Food Price Inflation is Good News for Agricultural Stocks
The average annual increase for grocery prices between 1990 and 2011 was a reasonable 2.8%. But since 2005, the International Monetary Fund's food price index has increased by 90%.
Meanwhile, the implied volatility for the most important traded commodities such as wheat, corn and soybeans is up by more than half.
All of this began in 2008. Food price inflation really began to take off when commodity prices soared and home prices plunged.
A combination of factors added fuel to the fire including converting corn and other food stuffs
into ethanol, a growing middle class in emerging countries like China, and a jump in oil prices.
What's more, food prices surged again last year on the heels of a drought, a wheat export ban in Russia, and bad weather in Argentina and Australia.
Since then things haven't gotten much better.
The latest USDA commodity price forecast predicts 2012 beef and chicken prices will increase by 9% and 5%, respectively. That comes after many food items posted double-digit increases in 2011.
It is no wonder people are struggling.
Food Price Inflation Hits a Tipping Point
Up until now, food price inflation has been held in check by producers and manufacturers afraid they might lose business by passing on cost increases to retailers and consumers.
While large multinationals such as Unilever (NYSE: UL) and Nestlé SA (PINK: NSRGY) have been absorbing the extra costs through cost cutting and productivity gains, smaller and midsized producers have struggled.
But all that may be changing...and fast.
A global survey by Grant Thornton shows that mid and small manufacturers who have been squeezed by higher costs for seeds, fertilizers and other supplies plan to charge retailers more over the next 12 months.
The survey, which covered 11,000 businesses across 39 economies, found that 41% of food and beverage businesses expect to increase prices in 2012, compared with just 12% a year ago.
In short, producers are now willing to push higher prices for raw goods on to retailers where the consumer will pay more.
"There are scenarios throughout North America and elsewhere where these players are now going to retailers and saying: "We have absorbed too much here and prices have to go up,'" Jim Menzies, global food and beverage industry leader at Grant Thornton Food, told The FT.
Agricultural Stocks Poised to Gain
As the planet's population explodes, the amount of arable land available for planting isn't able to keep pace. Over the past 50 years, grain production has doubled while arable land use has increased only 9%.
That means spending to boost agricultural yield is the most viable way to increase production and keep prices from soaring.
But while a short-term boost in food price inflation hurts, humans have used their imagination to come up with long-term solutions to many tough problems.
"Human ingenuity has a good track record of overcoming nature's constraints so far. A commodity bull market is really just a bottleneck, and, as a species, we've succeeded in bottleneck removal," Société Générale strategist Dylan Grice told MSN Money.
Investors should focus attention on low-cost commodity producers and the equipment providers that supply them, he said.
Governments around the globe and regional communities will have to spend big bucks to improve crop yields. And that means big profits for companies like Deere & Co. (NYSE: DE) and Agrium Inc. (NYSE: AGU).
Fertilizer prices also have nowhere to go but up and that bodes well forCF Industries Holdings Inc. (NYSE: CF). The company is trading at just eight times earnings, despite sales growth of over 50% the last two years.
Another good way to gain exposure to the big trend is the Market Vectors Agribusiness (NYSE: MOO) and Global X Fertilizers/Potash (NYSEArca: SOIL) ETFs.
Finally, you might consider the SouthernSun Small Cap Fund (MUTF: SSSFX).
According to Bloomberg Markets, the $300 million fund, whose largest investments are in agriculture and construction equipment companies, returned an average of 41.1% per year for the three years ended on Feb. 17.
Either way, one way to ease the pain of food price inflation is by investing in agricultural stocks.
Unfortunately, food prices aren't going lower anytime soon.
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