Wednesday, November 17, 2010

Why Food Bills Are Heading Higher

From MSN Money. This is besides the drought previously mentioned here.

"The big trends: 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 makes commodities look cheaper.

"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."


"Buy the trend and make money from it. Here's how.

First off, investors who want to buy agricultural commodities now 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.

But Rogers is worth listening to about the long-term trends because he's been studying commodities and getting the calls right for years. As he has predicted, the prices of agricultural commodities from sugar and cotton to corn, wheat, soy and coffee all recently hit highs not seen in years, if not decades. "We are still very much in a structural bull market, which will play out for another five or 10 years," agrees James Dailey, the portfolio manager of the Team Asset Strategy Fund (TEAMX).

Investors can jump in by buying exchange-traded fund or exchange traded notes designed to track the price of commodities, like Elements Rogers International Commodity Agriculture ETN (RJA, news, msgs), right now, then wait for pullbacks in the coming months and buy more.

They can also play this trend with stocks; I'll have names in a minute.

First, let's look deeper into the reasons experts cite to explain why agricultural commodity prices will keep rising (albeit with plenty of volatility along the way).

1. The global middle class wants good eats
The U.S. and Europe have fueled growth in emerging economies for decades by purchasing lots of goods and natural resources. That's created a rising middle class that expects to eat better -- which often means more steak, pork and hot wings. Cows, pigs and chickens consume a lot of grain, so this trend pushes up demand and prices.

"We helped industrialize the emerging markets, and we moved a lot of people out of poverty into the middle class," says Jerry Jordan, the manager of the Jordan Opportunity Fund (JORDX). "Now they are consuming more grains either directly" or as food for livestock.

That rising demand is outstripping the ability of farmers to produce more food through productivity gains alone, straining supplies and driving up prices, says Dailey.

2. Lousy weather hurts crop yields
Blame it on global warming, a rise in the ocean temperatures, sunspots or just bad luck, but the weather has taken a rough turn of late.

Drought in Russia and the Ukraine, dry weather in Brazil, floods in China, Thailand and Pakistan, typhoons in the Philippines, heavy rain in Canada and a hot summer in the U.S. have all made it harder for farmers to grow rice, wheat, corn, soy, sugar and other commodities.

A poor harvest in Russia has the country banning cereal exports for fear of inflation and food riots. Moves like this only drive international commodity prices higher. "You are going to see this more and more," predicts Jordan, of the Jordan Opportunity Fund.

3. Alternative-fuel demand sops up corn and sugar
Thanks to federal mandates, about 37% of U.S. corn this year will go to ethanol production, says Joseph Dancy, manager of the LSGI Technology Venture Fund. That's up from 20% as recently as 2006. "The U.S. is the world's largest corn producer and largest corn-exporting country, so this has a big impact on supply," says Dancy.

Last month, the Environmental Protection Agency approved a 15% ethanol blend in gasoline, which will up demand for corn even more.

4. A declining dollar drives up commodity prices
Meanwhile, the Fed keeps creating more money to try to spur growth. It may be what the economy needs, but investors see it as another reason to worry about the U.S. So they're selling the dollar, lowering its relative worth.

Because commodities are priced in dollars, this makes them look cheaper around the world and drives up demand. Consider, too, the flip side: If the Fed's moves work and spur growth, commodity prices will rise as growth increases demand, says Rogers. So prices go up either way, he believes."


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

No, I'm not suggesting you put a grain silo in your backyard -- or even that you try to access the commodities futures markets, which require a sophisticated brokerage account. You can get exposure to commodities through ETFs or ETNs."


"Jim Rogers likes to tell young people now they should forget about business degrees and study agriculture to become farmers. "Agricultural prices are going to go much higher over the next decade or two. So what has been a horrible business is going to turn into a good business."

But Johnson, the North Dakota farmer who now leads the National Farmers Union, isn't so sure. He cites thin profit margins, and the high price of land and equipment, which can set would-be farmers back $2.5 million or more to start a 2,000-acre farm on decent land in North Dakota.

"Good luck," he says. "It's a high-capital business to get into. You better have a pile of money."

You can also buy stocks of food manufacturers (Big Farm) such as Monsanto, Archer Daniels-Midland, and/or Cargill.

If you aren't inclined to play the drought for profits, then consider the last paragraph of the article--become your own farmer. That's probably the only way you can afford food in the future anyway. I suggest you get seeds NOW while you still can.

I imagine in the coming years I'm going to have to change my Food Stamp Challenge page title to "Eating for $100 Per Week or Less." Maybe not--just omit the meats, eggs, and dairy, and it should be okay (I hope).


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