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How the food crisis will affect your portfolio in 2011

Chris Mayer
0 Comments|January 21, 2011

U.S. spends 9% of its income on food, which is among the lowest percentage of any people anywhere at any time in history

A story I've been warning about for years is making sensational headlines right now. 

It's a story most people don't realize could make a huge impact on all of our portfolios in a number of ways. 

"U.S. Crop Stock Forecasts Deepen Fears of Food Crisis" read a recent Financial Times headline. The U.S. government cut its estimate for key crops. This came only a week after the U.N. warned the world faces "food price shock." Corn and soybean prices jumped and now sit at 30-month highs. Inventories are very tight. Corn is up 94% since June.  

And the world worries about a repeat of 2008, when food riots erupted in poor countries around the world. 

This has been in the works for a long time. It was there for all to see. The ratio of arable land to people has been falling for decades. Gains in crop yields have slowed. Population has expanded and income levels have grown. Diets have shifted. More people are eating more meat, which is much more grain-intensive to produce. 

And the love affair with biofuels puts food production in direct competition with energy. Plus, there are water scarcity issues affecting food supply. My readers have made tremendous gains from this trend by owning shares of agricultural fertilizer producers Potash (NYSE: POT) and Mosaic (NYSE: MOS). 

I should also make the point that this fits in with another topic I'm concerned about: inflation. Now, the man on the street uses the term "inflation" to mean when prices for everything seem to go up. Or put another way, inflation is when the dollars in his pocket buy less. In truth, this is the effect of inflation. The root cause is simply money printing. When you print more money, that money has less value than if you didn't print any new money at all. 

So what we are seeing with rising commodity prices is not only the supply and demand story I led off with. It's also the effect of paper money losing its purchasing power in the real world of things. This, too, was easy enough to see. Finally, all that money printing – the "quantitative easing" baloney you've heard about – is coming home to roost.

Still, it's disconcerting to see it all playing out. For the sake of our world, I'd rather have gotten this one wrong. But we have to deal with the market we are in. So what might "Food Crisis II" mean from an investment point of view?

Food prices will have to rise: There is no way around this. We are all going to pay more for food. Wells Fargo predicts U.S. retail food prices will rise about 4% this year. Some things will go up much more. Pork and beef could rise more than 10%. 

This won't necessarily mean that meat producer stocks are good buys, because they may not get to raise prices to fully offset the rise in feed costs. Anecdotally, for instance, The Wall Street Journal cited a Minnesota 300-cow operation that reported feed costs had doubled. Plus, I've listened in to the conference calls of a number of food producers – Tyson, Hormel, and Sanderson Farms. They all talk about getting squeezed by rising feed costs. 

I do think these companies will be good buys sometime this year, because people will adapt and farmers will respond. Producers won't produce meat at a loss for long. And farmers will bring every resource they have to bear. It's been slow getting the crops in the ground so far in many places. But ultimately, there is a lot of potential supply from Brazil and the U.S. 

Still, weather is the big wild card here. If we have a drought in the U.S. or in Brazil, this could really get ugly. 

Emerging markets are vulnerable: This follows from the above. It doesn't really faze the typical American to have to pay 4% more at the grocery store. Food is still such a small part of the typical American's budget. I think Michael Pollan in The Omnivore's Dilemma points out that the U.S. spends 9% of its income on food, which is among the lowest percentage of any people anywhere at any time in history. 

The same is not true in India or China or many emerging markets. In China, people spend 50% of every incremental dollar on food. And in India, it's more like 70%. So the rising price of food is felt more keenly in these markets. 

The price of food is rising faster in emerging markets, too. In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone. All around the world, emerging markets have a big problem with rising food prices. Indonesia's president is trying to get people to grow their own chili peppers. And the South Korean government recently released emergency stores of cabbage, pork, mackerel, radish, and other staples. I could go on and on. 

The point is that the emerging markets boom is not going to go far when it faces a food crisis. Already, the markets are starting to reflect this. India's Sensex was down three straight days and off 6% to start the year. Other markets also started badly. And if China and India and the rest slow down, it's going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.

I'm keeping a close eye on these developments. There will be opportunities in this crisis, as with all others. For instance, though rising grain prices are not good for meat producers or emerging markets right now, it's a boon for fertilizer stocks. As the old golf saying goes, "Every putt makes somebody happy."

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