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How to Protect Yourself and Profit from the Global Food Price Crisis

Commodities / Agricultural Commodities Apr 24, 2008 - 07:14 AM GMT

By: William_Patalon_III

Commodities

Best Financial Markets Analysis ArticleWhen the leader of the United Nation's World Food Programme warned that a "silent tsunami" of hunger is sweeping the globe because of soaring food prices, a lot of folks probably viewed it as just another clever sound bite tossed off by a bureaucrat.

Don't you believe it.


I'll grant you, the alliterative moniker for the crisis cooked up by WFP Executive Director Josette Sheeran was clever - if not downright brilliant: It was picked up by dozens of global news services and was actually featured prominently in quite a few headlines. It's also one of the most accurate descriptions of a growing global crisis that I've ever seen.

You see, the "silent tsunami" is real. And as the damage escalates, the silence will devolve into a grating global cacophony of pain, poverty and protests. The folks at the U.N., the World Bank, and in global capital cities from Beijing to Washington all have vowed to fight back. In Great Britain, the government this week hosted a world summit at its offices on Downing Street.
But there's a problem. And it's a pretty big one: You see, even the folks who are planning to battle back against the "silent tsunami" aren't fully armed in that they don't really understand all its causes.

Nor do the victims understand the very real steps that they can take to protect themselves - let alone how to offset at least some of the damage by profiting on the very real global trends that have whipped up this worldwide food firestorm.

Let me explain …

Fanning the Flames of a Global Food Crisis

By "silent tsunami," Sheeran is referring to soaring worldwide food prices - the first truly global food crisis since World War II. The WFP says the crisis already threatens 20 million children in the world's most-poverty-stricken regions, and has ignited demonstrations and protests in Africa, across Asia, and throughout the Caribbean. This unrest even led to deaths in Haiti and in Cameroon, where civil servant Samuel Ebwelle told a journalist from The Associated Press that the thought of continued escalations in the price of food scares him deeply.

"We are getting to the worst period of our life," said Ebwelle, 51. "We've had to reduce the number of meals we take a day from three to two. Breakfast no longer exists on our menu."
World Bank President Robert B. Zoellick claims that as many as 100 million people could be forced deeper into poverty. And U.N. Secretary-General Ban Ki-moon says the soaring price of food is undermining a goal of slashing worldwide poverty in half by 2015.

So just how bad is this "tsunami?"

According to the World Bank, worldwide food prices have risen a scorching 83% over the past three years. The price of rice - a staple of daily diets all across Asia - has actually doubled in the last five weeks. [Here in the United States, the Sam's Club warehouse stores unit of Wal-Mart Stories Inc. ( WMT ) actually began limiting rice purchases yesterday (Wednesday)].
Research such as the World Bank stats certainly give the crisis a somewhat daunting feel, but it's when an American consumer takes a look at actual grocery store prices that the impact finally starts to hit home. Consider these prices from a U.S. Bureau of Labor Statistics study:

  • A dozen large Grade A eggs that two years ago cost $1.33 now costs a U.S. shopper $2.17 - 63% more.
  • A pound of whole wheat bread has jumped 42% during that same period, moving from $1.32 to $1.88.
  • A gallon of whole milk has jumped 20%, moving from $3.22 to nearly $3.90.
  • And a pound of white flour, a key ingredient in so many things, has soared 39%, from 33 cents to 46 cents.

Add in the impact of rising fuel and energy prices - regular gasoline that consumers use to drive to their jobs or run family errands is up 18% in the past year, while the diesel fuel that powers the trucks and trains that deliver goods from producers to market has soared 44%.

The bottom line is this: In the U.S. market, inflationary forces have struck hard at staple goods - the essentials like groceries, gasoline and healthcare - causing them to soar, while having very little impact on luxury goods that many American consumers are avoiding right now anyway.

Because food and energy costs are backed out of - not included in - the so-called "core" rate of inflation, domestic pricing pressures still look fairly benign, with inflation running at a tad bit more than 4%.

But clearly the "real" inflation rate is much higher. And U.S. consumers and investors know it, because they're worried - if not afraid.

According to a USA Today /Gallup Poll released yesterday (Wednesday), 73% of the American consumers surveyed cited soaring food costs in the form of rising grocery bills as a concern, while nearly half said that food inflation has caused a "hardship" for their households .

That's here in the United States. Let's now take a look overseas, where the rising prices aren't merely a "hardship" - they're a disaster.

Causes, Effects, Solutions

The U.N.'s World Food Programme says the soaring food prices will leave a $755 million shortfall in its $2.9 billion budget, forcing cuts in vital programs.
"This is the new face of hunger - the millions of people who were not in the urgent hunger category six months ago, but now are," Sheeran said. "The response calls for large-scale, high-level action by the global community, focused on emergency and longer-term solutions."

But here's the crux of that problem: Before you can fix a problem, you have to understand its root causes. And it's clear to us that very few folks really see the big picture.
When asked about the causes for the massive run-up in food prices, "experts" listed many of the same catalysts:

  • Rising fuel costs.
  • The use of certain foods - such as corn - for the creation of biofuels that are being developed to combat global warming and to take up the slack for the increase in conventional fuel prices.
  • Rising populations.
  • Growing demand from emerging economies - especially China and India.
  • Floods and droughts that are being blamed on ongoing climate changes.

Unfortunately, they forgot two causes - and they're not small: The first is the implosion of the U.S. subprime mortgage bubble, and the second is a greenback that's so weak that it's threatening to disappear altogether. Both are part and parcel of inflation.

By creating all the cheap money that created, first, the U.S. Internet stocks bubble and, second, the U.S. housing bubble, the U.S. Federal Reserve essentially created the subprime mortgage bubble. When that burst, as all bubbles must, it created a global financial crisis that forced all the world's key central banks to create additional liquidity in an attempt to basically bail out the world's developed economies [and lest we try and blame the United States for all of this, let's not forget that Great Britain has a humdinger of a housing bubble that's deflating, but hasn't quite fully collapsed].

The central banks have all pumped capital into the global financial system, and the U.S. central bank has since Sept. 18 been waging a rate-cutting campaign as aggressive as any we've seen in decades.

Unfortunately for all the starving folks abroad, these rate reductions are highly inflationary: They continue to force the greenback ever lower, while at the same time helping send commodity prices higher and higher.

When the U.S. central bank first cut rates in mid-September, it took the benchmark Federal Funds rate from 5.25% to 4.75%. According to Money Morning Contributing Editor Martin Hutchinson, oil closed that day at $82 per barrel, gold at $770 per ounce, and the CCI Commodity Price Index at 435.

"The flood of money that has been poured into the world's financial system by the Fed and the world's other central banks in the last seven months has had the anticipated impact," Hutchinson said recently. Now, "oil is trading at $119, gold is at $936 and the CCI Index is at 545. While Americans consume only moderate quantities of raw commodities as a percentage of [their] total consumption (there is little, if any, iron ore in an IPod, for example), for poor people in the Third World, commodities still form the bulk of their budget. It's no wonder, then, that we'd heard justified calls from the World Bank and others to devote more money to fighting starvation."

Here's the problem: To keep the U.S. economy out of a protracted recession, additional rate cuts may be needed. Indeed, many housing-sector observers are clamoring for the reductions in interest rates as a way of reviving that critical part of the U.S. economy.

And it would jump-start the housing market - directly by reducing mortgage costs and indirectly by causing inflation to accelerate. If inflation in 2009 is 15%, and people get pay rises of about that level, houses won't look so expensive by the end of that year, Hutchinson says.

Unfortunately, the most vicious inflation would come in the form of higher energy and commodity prices. And that would cause already-high food prices to surge even higher.

Clearly, the U.S. dollar, the U.S. economy, and its housing market will remain as challenges for quite some time.

But the reality is that the solution to the food problem is going to be a long-term deal anyway. Fortunately, the solution dovetails in perfectly with another powerful global trend - this one quite positive in nature, and potentially quite profitable.

I'm talking about the "Global Ag Boom."

When Agriculture Meets Science

When most people think about biotechnology, they only consider such things as stem-cell research, genetic engineering and curing cancer.

But there's another aspect of biotech, and it's just as powerful a concept. I'm talking, of course, about the genetic engineering of crops and seeds, and the scientific tweaking of fertilizers and herbicides - either to maximize their effectiveness, or to customize them so that they will flourish in very specific climates.

Long-term, that global "Ag Boom" is the answer to the current food crisis. It's also how you can offset the rising costs on the consumer side of your personal ledger by ramping up profits from this very same trend on the investment side of your own ledger.

Interestingly, British Prime Minister Gordon Brown appears to be one of the enlightened ones involved in this search for a food-crisis fix. While noting that there was a "world food crisis" under way that threatens to "roll back progress made in recent years to lift millions out of poverty," Brown then called for an "agricultural revolution" for farmers to produce higher-yielding crops.

Ag Boom Plays to Make Now

First of all, you have to hedge your expenses and position yourself to profit from the worldwide surge in commodities prices. Investment guru Jim Rogers - one of the first to correctly predict this trend several years ago - says it's a long-term play with plenty of room to run.

In a recent interview in Singapore with Money Morning Investment Director Keith Fitz-Gerald, Rogers said he's continuing to tell investors to buy commodities - including agricultural commodities.

"We've advised our readers to be long oil, long resources and long commodities in general," Rogers said. "The equation was very simple: The world is depleting resources roughly four times faster than they're being replaced. And, with oil in particular, unless you've got a few million years to wait, Mother Nature's not making [any more] any time soon."

To invest in the commodities boom, look at these two exchange-traded funds (ETFs):

  • Van Eck recently launched its Market Vectors Agribusiness ETF ( MOO ), a fund that really reflects the breadth of the agriculture sector, apportioning its holdings across such sectors as chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/bio-diesel (2%).
  • The Deutsche Bank AG ( DB ) managed Power Shares Agricultural Fund ( DBA ) is intended to reflect the performance of commodities in the agricultural sector - soybeans (31%), wheat (28%), corn (23%), and sugar (16%).

For several direct plays, consider these three stocks:

  • Take a close look at Potash Corp. of Saskatchewan Inc. ( POT ), a Canada-based integrated fertilizer and related industrial and feed products company. The stock has had a very strong run, but two weeks ago the company and a rival both said that Chinese customers had agreed to pay $576 per ton for potash this year , a massive jump from the $176 per ton rate of 2007. The accord was for 1 million tons of fertilizer.
  • E.I. du Pont de Nemours & Co. ( DD ) - commonly known as DuPont - produces crop-protection chemicals and seed hybrids, which are in huge demand globally as countries work to accommodate soaring incomes and growing populations in emerging markets such as China. Earlier this year, the firm received approval for two new herbicides that are designed to protect soybeans and wheat - two commodity crops whose prices have soared to record levels. DuPont is very well positioned - because of its products, and because it's serving customers in more than 70 countries.
  • The other such player to consider is the St. Louis-based Monsanto Co. ( MON ), who recently reported fiscal-second-quarter earnings doubled from the previous year on the strength of its corn seed and herbicide sales.  Once highly controversial, Monsanto's genetically engineered products have established a strong market position in agricultural markets throughout the world. Farmers in China and India planted more than 17 million acres of biotech crops last year, according to BusinessWeek . Approximately 7% of the world's farmland acreage is planted with genetically modified crops. While some pockets of controversy remain - and likely always will - Monsanto's financial performance indicates that acceptance of these necessary products is growing.

Finally, if you believe that biofuels - and other forms of alternative energy sources - will be an inevitable part of the global future, consider the following "green" ETF: The PowerShares WilderHill Clean Energy ( PBW ), one of the better-quality funds that focus on "clean" technology as determined by the WilderHill Clean Energy Index .

[ Editor's Note : Check out Money Morning Contributing Editor Martin Hutchinson's new investment research report that details three ways to profit from the ongoing surge in oil prices . And look here for details on how you can obtain a free copy of investment guru Jim Rogers' new bestseller, " A Bull in China ," which details profit plays for that market.]

News and Related Story Links:

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

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