Tony Daltorio: If you thought your grocery tab was high in 2012, brace yourself because this year will be even worse- but that just means there are stocks to buy now that will let you cash in on higher food prices.
Last year’s drought drove up prices of grains such as corn, wheat and soybeans. Soybean prices jumped 40% earlier in 2012 while wheat prices soared about 50%. Prices declined in the fall as crops were harvested, but remained elevated.
Because of the higher prices of animal feed such as corn and soymeal, many ranchers had to slaughter animals earlier than planned. This caused a brief bump up in meat supplies in 2012, but threatens to lead to tight meat supplies and higher prices in 2013.
The Livestock Information Center in Denver forecasts that this year’s U.S. beef production will come in at 24.8 billion pounds – the lowest level since 2005.
In 2014, the Livestock Information Center forecasts only 23.6 billion pounds of beef will be on the market – the lowest level since 1993.
And Larry Pope, the CEO of the world’s largest pork producer, Smithfield Foods Inc. (NYSE:SFD), told the Financial Times in 2012 he thought pork and chicken would soon join beef on the list of increasingly expensive meats.
The U.S. Department of Agriculture forecasts food prices overall will increase 3.5% to 4% in 2013.
However, like most government estimates, those could be on the low end due to these three main factors driving higher prices.
Why Food Prices Are Heading to New Highs
In fact, global wheat prices have climbed to their highest level in four years and could rise more.
One of the main reasons for higher food prices in 2013 is limited supply as poor weather conditions have killed crops.
Siberian wheat farmers, suffering from an unusually dry and hot summer, hadn’t seen weather conditions so poor since the early 1960s. The Ukraine has unofficially banned wheat exports from the country. The overall wheat crop in the former Soviet Union in 2012 dropped 33% from 2010 levels to only 77 million tons, the lowest since 2002-03.
Weather could be a concern again in 2013, as weather patterns tend to stick around a few years.
That can already be seen globally, as 2012 saw poor weather conditions in other grain-growing regions besides the United States, including Europe, Australia, Brazil, Argentina and the former Soviet Union.
According to the United Nations’ Food and Agriculture Organization, global wheat supplies will fall in the 2012-2013 season to just 661 million tons – below estimated global wheat consumption of 688 million tons.
Smithfield’s Pope said that it wasn’t just the drought that would push food prices higher. Another culprit is U.S. policy on ethanol.
Under a 2007 energy law, U.S. refiners are to use 13.8 billion gallons of renewable fuels, such as ethanol, this year. Ethanol manufacturers consume roughly 40% of the U.S. corn crop.
That has helped push corn prices up to more than $7 per bushel, and contributed to higher meat prices.
Finally, population growth will increase food demand while supplies are restricted.
The United Nations’ Food & Agriculture Organization has said global food output must rise 70% by 2050 to feed a world population that will grow to 9 billion, up from 7 billion now.
Plus increasingly wealthy consumers in emerging economies will want to spend more than they have before on meat.
“In just seven years, the world will need not only to produce, but to move 20 percent more food and also store it, transport it and process it,” Chris Mahoney, director of agricultural products at Glencore International told Bloomberg News. “Without the transport, logistics infrastructure and processing capacity, production even if it keeps pace with demand will be unable to reach the consumer.”
Stocks to Buy Now as Food Prices Take Off
Investors can profit from the higher prices for grains and meats through stocks related to food production and exchange-traded funds (ETFs) that follow these increases.
Archer Daniels Midland Co. (NYSE:ADM) stores, transports and sells agricultural products globally. It has a 2.4% dividend yield.
The Mosaic Co. (NYSE:MOS), a producer of phosphate and potash crop nutrients, has climbed nearly 8% so far this year. Wall Street has a one-year price target of $84.46, a whopping 38% higher from Monday’s closing price.
On the grains side, there are several excellent exchange-traded funds (ETFs) from Teucrium. The ETFs include the Teucrium Corn Fund (NYSEARCA:CORN), the Teucrium Wheat Fund (NYSEARCA:WEAT) and the Teucrium Soybean Fund (NYSEARCA:SOYB).
On the livestock side, consider the exchange-traded note (ETN) iPath Dow Jones UBS Livestock Total Return Subindex ETN (NYSEARCA:COW). It has a 63.5% cattle component, with the remainder in hogs.
With higher prices for grains and meats expected for the foreseeable future, these investments could help you hedge higher household food bills.
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