“Food inflation hasn’t reared its head for some time, and I think it’s about to start making headlines again before long,” Krauth wrote in a Jan. 18 note to subscribers of his Real Asset Returns investment service.
Sure enough, an inflation report yesterday (Wednesday) from the Labor Department showed that the biggest increase in January prices came in the food category.
Food prices – for both groceries and food eaten at restaurants – rose 0.7% in January, compared with December, accounting for more than three-fourths of the increase in the Producer Price Index (PPI).
The biggest driver of food inflation in January was the cost of vegetables, which rocketed 39%, withbroccoli, cauliflower and lettuce increasing the most.
The U.S. Department of Agriculture’s Economic Research Service is projecting food prices in 2013 will increase 3% to 4%, an annual increase the agency says is above the historical average.
The ERS said it expects animal-based food products (mostly meats) to be hit hardest, with cereals and bakery products also seeing above-average price increases.
The return of food inflation to the U.S. should come as no surprise, as it has become a worldwide trend over the past decade.
The Food Price Index developed by Food and Agriculture Organization of the United Nations has more than doubled from 97.7 in 2003 to 209.8 now following a decade of stability. (The index stood at about 102 in 1993.)
What’s Driving Food Inflation?
Food inflation has several underlying causes, none of which figure to improve any time soon.
“Oil and transportation are a big factor in food prices,” Krauth explained. “And if you look at oil, it started climbing in late December, and has remained high. But more importantly, gasoline was on the cusp of a breakout in mid-January. That came through, and I think will be maintained.”
Gas figures into food prices not just because most of it is moved by truck, but because mechanized farming consumes a great deal of fuel in the production of crops.
At the same time, the drought affecting much of the U.S. hasn’t gone away. As of mid-February, 56% of the country was still in drought, according to the U.S. Drought Monitor.
“The drought will have a significant impact on prices, especially beef, pork and chicken,” Ernie Gross, an economics professor at Creighton University who studies farming issues, told CNBC.
“Forecasts are for a 4% increase in food this year, but I think that’s on the low side if the drought continues. Food prices will likely be going up much more than the forecast.”
And relief is not on the way.
“In fact, we are forecasting drier conditions,” Roger Pulwarty, director of the National Integrated Drought Information System, a federal agency, told Reuters.
Beyond the short-term factors, several long-term trends have contributed to food inflation, including a growing global population and the increasing use of food crops like corn to make biofuels.
How to Profit From Food Inflation
No one likes to see their grocery bill rise, but the silver lining for investors is that there are ways to profit from food inflation.
Rising food prices will spur companies to increase food production, creating several profit opportunities.
Beneficiaries include equipment makers like Caterpillar Inc. (NYSE:CAT) and Deere & Co. (NYSE:DE) as well as seed-makers like Monsanto Company (NYSE:MON).
But when it comes to profiting from food inflation, Krauth prefers another group of stocks.
“One of the better ways to play higher food prices is through the fertilizers,” Krauth said. “I like potash. Shipments are expected to be up as much as 10% this year.Major contracts for supply have been signed with both China and India.”
Two major players in potash are Mosaic Co (NYSE:MOS) and Agrium Inc. (NYSE:AGU).
Related: Market Vectors Agribusiness ETF (NYSEARCA:MOO).
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