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What the Texas State Fair Taught Me About Inflation

Commodities / Inflation Oct 12, 2010 - 11:48 AM GMT

By: Jared_Levy

Commodities

Best Financial Markets Analysis ArticleI spent my Saturday wandering around the good old Texas State Fair. I walked though the livestock area and stables full of animals of all kinds from all over Texas, and right before exiting I turned to my right to see "Millie" the Brown Swiss cow staring right at me.

My first thought, while staring back into the eyes of this cow, was inflation. Most don't typically associate cows with inflation, I know. But here's what that Brown Swiss cow and inflation have to do with one another...


Inflation Is Knocking
Sara and I have discussed printing U.S. dollars, monetary policy, budget deficits, gold prices, silver prices, precious metals and even crude oil as having direct correlations with impending inflation, but we must not forget about the most important commodity of them all... FOOD!

Without getting into gross detail about the world's eating habits, I wanted to offer some simple examples to help you get a grasp on the importance and consumption of food and, more importantly, the prices of food when inflation comes to roost.

Consumption
According to the USDA, the average American eats about 2,000 calories a day, which breaks down to about 100 grams of protein, 300 grams of carbs, 130 grams of sugar, 15 grams of fiber and about 95 grams of fat.

The U.S. Department of Agriculture estimates that the average person in the United States eats 0.5 lbs of meat, 1.6 lbs of dairy products, 0.2 lbs of fats and oils, 0.8 lbs of fruits, 0.7 lbs of vegetables, 0.5 lbs of grains, and 0.4 lbs of sugars per day for a total of 4.7 lbs of food per day. (Remember there are many non-edible parts of proteins, grains and veggies.)

All told that is over 1,700 pounds of food a year per person (this obviously varies dependent upon age and sex). On average, that can be thought of as 183 pounds of meat/poultry, 584 pounds of milk and its derivatives, 183 pounds of bread, 73 pounds of oils, 146 pounds of sugars, 256 pounds of vegetables and 292 pounds of fruit per year.

Changing Eating Habits
Americans are certainly unique in the way that we eat, but the world's tastes and consumption are changing as well. If you look at the chart below from the Food and Agriculture Organization of the United Nations, you can see demand increasing and more and more countries consuming proteins (China), which puts demand not only on meat prices, but on grains to feed the livestock.

Global and Regional Per Capita Food Consumption (Kcal Per Capita Per Day)


Region

1964 - 1966

1974 - 1976

1984 - 1986

1997 - 1999

2015

2030

World

2358

2435

2655

2803

2940

3050

Developing Countries

2054

2152

2450

2681

2850

2980

Near East and North Africa

2290

2591

2953

3006

3090

3170

Sub-Saharan Africa

2058

2079

2057

2195

2360

2540

Latin America and the Caribbean

2393

2546

2689

2824

2980

3140

East Asia

1957

2105

2559

2921

3060

3190

South Asia

2017

1986

2205

2403

2700

2900

Industrialized Countries

2947

3065

3206

3380

3440

3500

Transition Countries

3222

3385

3379

2906

3060

3180

The Raw Cost of Food

Looking at average prices, based on a four-person household, of several food products for my estimates, most data is taken from USDA, futures prices and retail food websites. I am using a blend of prices, based on an average of different food products in each group. The point of the data here is to show the potential increase in costs for the average family. These figures do NOT include dining out or premium items.

Food

Lbs Per Year

Average Cost Per lb

Total Annual Costs

Meat/Poultry

732

3.23

$2,364.36

Milk Products

2,336

1.20

$2,803.20

Bread Products

732

4.50

$3,294

Fruit products

1,168

1.10

$1,284.80

Sugar products

584

3.00

$1,752

Oil products

292

.58

$169.36

Veggie Products

256

1.20

$307.20

Annual Food Expenditures for a 4-Person Family (Conservative Estimate): $11,974.92
(Remember that we are now in an economic downturn)

I found that about 24% of the average household's income is spent on basic food needs. For most of us, that number is probably higher because many of us dine out and pay premiums for prepared foods. But here's what we really need to think about: When food prices rise, that cuts into our savings and other spending... and we need to protect our savings from getting eaten up by food prices!!

A 10% increase in the cost of food would mean another $1,200 jump in annual costs ($100 per month) on average, per year in this case. Food is not something we will stop spending money on -- IT'S A NECESSITY OF LIFE.

By the way, corn, wheat, sugar and other commodities are all up way over 10% in the past couple months.

Inflation here in the U.S. or even the precursors to it can drive commodity prices higher, and since many commodities are denominated in U.S. dollars, that means a weak dollar = higher commodity prices.

The International Fund for Agriculture Development (IFAD) estimates that:

  • The world population is expected to grow by 50% by 2050.
  • Food production will need to rise by 50% by 2030 to meet growing demand.
  • There are about 500 million small farms in developing countries, supporting almost 2 billion people -- one-third of humanity.
  • From 2007 to 2008, the number of undernourished people in the world rose by 40 million to a total of 963 million.
  • There is a food crisis out there for many people around the world.

What Can You Do to Protect Yourself?
Food demand is here to stay and with inflation, food costs will be on the rise. Most likely you will see these pricing pressures on the goods that you buy at the market each day.

Of course, one way to hedge against this is to buy precious metals like gold and silver. And you've probably read past issues of Smart Investing Daily in which Sara and I have recommended certain precious metals ETFs and other investments. As long as inflation remains a threat, we'll continue to offer you precious metal plays.

For now, here's another way you can take advantage of rising food prices. You can purchase the Agribusiness ETF (MOO:NYSE), which holds companies such as John Deere (DE:NYSE), Mosaic (MOS:NYSE), Potash Corp (POT:NYSE) and others.

Another way for non-futures traders to invest in agriculture and commodities is the PowerShares Deutsche Bank DB Agriculture Fund (DBA:NYSE). The DBA holds futures contracts in corn, soybeans, wheat, sugar, cocoa, cattle and more.

The world has to eat and as world populations grow and societies like China evolve to eat more proteins, demand will continue to increase. Couple this with our country's printing press stuck in the "on" position, and you have a recipe for continued strength in commodity prices!

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source : http://www.taipanpublishinggroup.com/tpg/smart-investing-daily/smart-investing-101210.html

By Jared Levy
http://www.taipanpublishinggroup.com/

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

Copyright © 2010, Taipan Publishing Group


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