How to Profit From Soaring Food Demand

Food prices are soaring. Here are some tips for investors who want to invest in agriculture.
Food prices are soaring. Here are some tips for investors who want to invest in agriculture.

Anyone who has been to a supermarket lately knows that food prices are spiraling higher. In the coffee aisle, prices are up 30% in the last couple of months alone, and chocolate, beef and chicken also have grown more costly. Sugar is at a 30-year high. Wheat prices have shot up 47%, thanks to droughts in Russia and floods in Queensland, Australia. And corn keeps surging, not only because of its use as food and feed, but also because of its role as part of the burgeoning biofuels industry.

Food-price inflation doesn't always get much attention in the U.S. because food accounts for such a small part of our overall household budgets, usually 10% to 15%. But those prices play a far bigger role elsewhere, making up as much as 90% of household spending in Africa and 30% in China and other developing countries.

The U.N.'s Food and Agriculture Organization this week reported that world food prices have reached a record high, surpassing the food crisis of 2007. In December, the FAO's food basket of meat, sugar, diary and cereals was up 4% from November.

But you can also find some profit in this pain: When a commodity's price climbs, it generally signals an investment opportunity. That holds true for food as well.

Why Ag May Is Poised for Growth

John Stephenson, an asset-management expert who has written a new guide called The Little Book of Commodity Investing, expects agricultural commodities to grow in value because "the world has more people in it, and people are changing their diets as they become more affluent and now eat more protein." That means high demand for meat and for animal feed such as corn.

Want to get in on the booming agricultural market? One way to invest in it is to buy futures on the Chicago Board of Trade. But for small investors, futures often can be confusing and difficult to trade. Instead, Stephenson recommends other methods, including investing in exchange-traded funds. Unlike ETFs for gold and silver, agricultural ETFs don't actually own the commodity, but instead buy futures contracts, saving investors the trouble.

Two of the most popular agricultural ETFs include the Agribusiness ETF (MOO), which is based on the DAXglobal agribusiness index and has grown 50% in the last six months, and the PowerShares DB Agriculture Fund (DBA), which is based on the Deutsche Bank Liquid Commodity Index Diversified Agriculture Excess Return and is up 32% from six months ago. Both ETFs invest in a basket of agricultural commodities, which can shift quickly, making it difficult for investors to know how much they're betting on corn, for example, or soybeans at any specific time.

For more specific commodity investments, Stephenson recommends ETF Securities, a U.K.-based firm. It has specific ETFs for coffee (COFF), corn (CORN), leanhogs (HOGS), soybeans (SOYB), sugar (SUGA) and wheat (WEAT), all of which are traded on the London Stock Exchange.

Be Careful With Your Eggs

Stephenson points out that all commodity ETFs face the risk of contango -- when the futures price is higher than the spot price. If the ETF buys wheat futures for March delivery for $8 a bushel when the spot price is just $6.50 and the spot price doesn't rise, it will end up selling the wheat for $6.50 at the end of 90 days and still have to buy a new three-month future for $8.

"That could be a loss, or at least not the gain you were expecting," Stephenson says. "That's why I tend to say invest a little in financially backed ETFs, but don't put all your eggs in that basket."

His second-favorite food commodity investment is fertilizer stocks, such as Mosaic (MOS), Potash (POT) and Agrium (AGU). "They trade alongside commodities so that you get the upside you'd expect from rising corn prices, and fertilized food is the only logical way to meet the world's demand for food," Stephenson says. "Generally speaking, a farmer has to fertilize every year, so there is a constant revenue stream."

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Two other possible agricultural strategies include investments in farm-equipment manufacturers like Deere (DE) and Case New Holland (CNH). However, Stephenson believes these stocks are less compelling because farmers don't buy new tractors every year, even in good times.

Another possible play would be to invest in manufacturers of genetically modified seeds such as Monsanto (MON), whose shares rose 3% Thursday after reporting sharply higher orders for spring planting.

But beware: The rising cost of raw materials often affects food companies' share prices. Companies with strong brands, like Kraft (KFT) and Heinz (HNZ), have the ability to raise retail prices and will likely fare best. And meat processors like Tyson Foods (TSN) are often hurt when food prices rise.

If Stephenson is right about increasing protein consumption in the developing world, a long-term food play might be to invest in diet stocks. After all, he notes, Nestle (NSRGY) bought diet firm Jenny Craig last year.

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