Tuesday, May 22, 2012

New Global Food Crisis Looms

Most investors are well aware of rising oil prices and often try to figure ways to profit from this trend. Now another, perhaps bigger, risky trend is underway around the world – a repeat of the 2007-08 spike in food prices. It is not an area investors should ignore or underestimate since profits can also be easily made from rising prices for grains such as corn and soybeans along with meats.

What is causing the rise in prices? Mainly a lot of bad weather around the world coupled with very strong demand for grains coming from China.

The good news, when compared to the crisis of a few years ago is that the gains are less broad-based and are more concentrated in oilseeds including soybeans, rapeseed, canola and corn. Oilseeds are a source of cooking oil globally, but are also the main source of protein-rich feed meal used to fatten livestock (corn also is key in feed meal). This rise in feed costs in turn is already pushing up the price of meats globally.

The price of soybeans is already up more than 20 percent since the start of the year and is trading near $15 a bushel. Many in the industry believe that the price will challenge the all-time high of $16.63 a bushel set in mid-2008. Soybean production is down sharply in many of the crucial growing areas in Latin America including Brazil, the world's second biggest producer, thanks to La Nina causing hot and dry weather in the region.

This is a key point for investors to take in since Latin America produces more than 55 percent of the world's exports of soybeans. Add to that the fact that US farmers are planting less soybeans this season and it should come as no surprise that the US Department of Agriculture now estimates that global soybean production in the current growing season will suffer its biggest annual drop since record keeping began in 1965. This output drop comes at a crucial time too since Chinese imports of soybeans increased 20 percent in the first quarter of this year.

The situation for the global corn crop is not as dire since US farmers are increasing their planting of the crop. However corn prices are hovering at about $6 a bushel, triple the level they were just a decade ago and poised to move even higher.

China, which is not normally an importer of corn, is in the market. Expectations in the industry are for China to place its largest orders for corn in the 2011-12 and 2012-13 crop seasons since records began in 1965. It is believed that with appetite for meat rising in the country that China needs the corn for animal feed.

So how can investors play these rising food costs? One obvious way is to own the companies that trade grains globally like Bunge or Archer Daniels Midland.

A better way is to own companies that produces seeds for farmers – Syngenta AG ADR (NYSE: SYT) and Monsanto (NYSE: MON). Syngenta makes corn and soybean seeds while Monsanto produces genetically modified versions of corn, canola and soybean seeds. Monsanto forecasts that demand for corn is expected to rise to 2.5 billion bushels from 1 billion, while demand for soybeans will jump to 1 billion bushels from 200 million bushels in just the next five years. Syngenta has a similar forecast.

Of course, exchange traded funds offer investors a quick and easy way to invest into this agricultural trend. The most liquid and broad-based ETF is the PowerShares DB Agriculture Fund (AMEX: DBA). It is composed of futures contracts on various agricultural commodities. Right now, it has over 13 percent in soybean futures, nearly 12 percent in corn futures, 7 percent in hog futures and over 17 percent in cattle futures (remember those rising meat prices).

If investors want to invest specifically in corn and soybeans, there are two funds available. These are the Teucrium Corn Fund (AMEX: CORN) and the Teucrium Soybean Fund (AMEX: SOYB). Both these funds have positions in crop futures traded on the Chicago Board of Trade – corn and soybeans respectively.

This is a trend that should stay in place for the foreseeable future. According to Richard Feltes, vice-president at commodities broker RJ O'Brien in Chicago, the market is “not going to see food inflation abating in the next 18 months to two years.” In the meantime, investors should be able to eat up some profits from these rising prices.

This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.


  1. The problems in the euro zone seem out of control.

  2. Stay tuned for the next crisis because if its not financial it will be non financial.