Cashing In On Rising Food Costs.

By David Dutkewych

October 14, 2011

Note from Andrew Gordon: As commodity specialist David Dutkewych makes clear, nobody likes rising food prices except the farmers. Finally, inventories are up and prices of some stuff like grains, cost less. But one grain in particular offers you a superb investing opportunity…

Dear Insider Fortunes Reader,

We all know that food prices are on the rise.  But do you still find yourself staring at your latest grocery store receipt in disbelief?

We all need to eat, but before you take a stab at extreme couponing, growing your own vegetables or raising your own chickens, stop. 

There’s an easier way to cash in on these higher prices.

For a while food prices were under control. They increased less than 1% between 2009 and 2010, the lowest food inflation rate since 1962.

But those days are over. The price of groceries rose 5.4% from July 2010 to this July, according to the USDA’s latest report.

So Why Are Food Prices Going Up?

Some macroeconomic factors driving food prices include:

1. Higher costs incurred by food system firms. Both producers and suppliers have seen their operating cost increase.

2. Crazy weather. Droughts and floods have led to increases in the price of wheat, corn and soybeans, all used for animal feed.

3. Fuel prices. Higher fuel prices affect everything, but especially dairy products.

4. The weakening buck. The US dollar is very weak by historical standards. That means the purchasing power of people abroad is stronger. This increases demand for the food the US exports. However, it also means it will cost you all the more to buy a gallon of milk.

The above developments are all important but this is what nobody is talking about… Fast-rising global demand.

Growing prosperity in China, India and other developing economies has led to increased demand for meat and other higher-end food items. 

China, with its growing middle class, has dramatically changed its food consumption. People are eating less rice and more pork, fish and chicken. Pig herds are swelling, and demand for some dairy products has been climbing 20% a year. This not only creates demand for meat, but the gains used to feed the animals, as well.

India, the world’s biggest sugar user, may produce less than it consumes as early as October 2012. For the first time in three years it is expected to import sugar.  The sugar you buy at American grocery stores will be more expensive as a result.

Food producers pass on most of the costs I’ve listed above to the consumer. Whether you like it or not, this trend has become the norm. Driven by corporate greed, prices will continue to go up.  Producers like General Mills (GIS), Kellogg (K), and Kraft Foods (KFT) don’t care about their customers.  But they do care about their profits. So they are not as eager to reduce prices when their costs go down.  This is how consumers keep getting stuck paying higher prices.

What’s the Impact?

Earlier this year, global food prices soared to levels last seen in 2007-08. Recently, prices have begun to come back down. But the drop isn’t expected to last. Last week, Oxfam (an international charity organization fighting poverty and world hunger), warned that food prices could double over the next 20 years and mark the beginning of a permanent food crisis.

A new report by the UN states that high, unpredictable prices are likely to continue. These high food prices will not only put a strain on the already tight food budgets of the world’s poor, but also raise the cost of helping them with aid. 

Households in some countries spend as much as 80% of their income on food. Higher prices will clearly hit them hard. Even here in the US, one in four Americans are “worried about having enough money to put food on the table in the next year,” according the Food Research and Action Center (FRAC).

Will Next Year Give Consumers Some Relief?

Not likely. For 2012, food price inflation is expected to subside a bit from 2011 levels. The all-food CPI is projected to increase 2.5 – 3.5% over 2011 levels.  This indicates that although prices will be higher next year, the increase will be less drastic than in previous years.

Can You Cash In On These Commodities?

Short of eating less, you may not be able to do much to shrink your grocery bill. However, I’m going to show you how to find an upside to these increased costs and take advantage of rising grain prices.

At the moment agriculture commodities have been beaten down on fears of an economic slowdown.  This has led to higher-than-expected inventories.  And that’s good news for you, as an investor.

World inventories of wheat total 202.37 million metric tons, the most since 2002, according to U.S. Department of Agriculture. Global corn reserves were pegged at 123.19 million tons, 4.9% higher than the September forecast.

For commodities, excessive supplies mean lower prices.  I think this is only temporary.  It will take some time (4-6 months) for these big supplies to come down. Then, I think they will be set up for a run higher.

Corn is where you can make some serious money. It has a large number of uses, creating additional demand. The US government requires ethanol (made from corn) in every gallon of gas. Hundreds of thousands of acres that once grew corn for people now grow it to help power our cars. 

As usual, timing is everything in the investment game.  Even with the price of corn down from its August high, now isn’t the best time to get back into the game.  I recommend holding off a few more months for supplies to come down. 

Then, when it’s time, take a position in the Teucrium Corn Fund (CORN). See the one year chart below.

David Dutkewych

Commodity Specialist

Insider Fortunes

Five Reasons Why Record-Low Rates Are Doomed to Fail

By Andrew Gordon

I’ve mentioned this about a dozen times to you. Low interest rates aren’t working. But I’ve never told you all the reasons why. So let me do that now. And if you’re on speaking terms with Mr. Bernanke, let him know too.

1. 20% or more down to buy a house. Half of Americans in a recent poll said they couldn’t save enough for a down payment.

2. Most people who can afford to refinance have already locked in low rates.

3. Many can’t qualify for the low rates or don’t have high enough credit scores.

4. Potential home buyers are afraid in this economy. Fewer people are voluntarily leaving their jobs. They’re scared they won’t be able to find new ones. High unemployment is spooking people.

5. And repeat buyers have too little equity in their current homes to qualify for loans. In fact, 28% of homeowners are under water with their mortgage.

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