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Food Price Inflation

7 Stocks To Profit from Food Price Inflation

Written by Brian Hicks
Posted June 17, 2008

My wife and I went food shopping this weekend... And despite our cost-cutting, coupon-using efforts, five bags of groceries cost us $155. And we hardly got anything. But we're not alone in our frustration. Millions of Americans are not only struggling to pay for gas just to get to the food store, they're struggling to pay the grocery bills.

And as much as I'd like to tell you it'll get better, which will eventually happen, it won't happen soon, no thanks to high waters in the Corn Belt.

But instead of fretting over cost, you can learn how to profit. We'll show you 7 ways to profit from food price inflation below, but first let's go into a little background.

Food Price Inflation: Corn Could Surge to $10 a Bushel

In the Corn Belt, flood waters are high. Crops are destroyed. And corn continues to set record highs, with some calling for $10 a bushel, near-term. Current estimates peg Iowa loss at one million acres of corn and two million acres of soybeans, or about 20% of grain output.

That means supply is tight. And it's too late in the season to start replanting corn and any opportunity to plant soybeans in time for the fall is quickly disappearing.

For grocery shoppers, the destroyed corn means pricier corn, soda, cereal... even cough syrup, pudding and gravy. It's also used to feed livestock like pigs and chickens. Soybeans are in everything from flour and milk to oil.

Going Bananas Over High Cost

Even banana costs are rising. Chiquita Brands, for example, citing higher costs stemming from poor weather in Central America and Ecuador, said that it expects to post a "significant loss" for Q3 2008, and is reporting that weather increased the costs of high quality bananas. While the company was trying to make up for higher banana cost by passing it on to consumers, it was unable to bridge the cost gap.

Higher grain cost have already punished food companies like Kraft Foods and Sara Lee, too, which rely on corn and wheat to make their products. Livestock producers like Smithfield Foods have also been knocked down.

In the end, we'll just have to get used to higher grocery cost. It makes it worse, considering that grocery prices rose 4% last year. And some estimates peg another 7% to 9% increase in grocery bills this year alone, thanks to flood-induced shortages.

We may even see a 10% in poultry, hog and cattle, according to industry experts. We may not have felt the "protein pinch" yet from higher meat costs, but it is coming. Says Richard Bond, CEO and President of Tyson Food (per Wall Street Journal), "retail chicken prices will have to jump by double-digit percentages in 2009 for poultry producers to recoup their feeding cots and current prices."

You don't need to stockpile food. But you may want to buy a little more when your favorite products are on sale.

How to Profit from Food Price Inflation

One thing I've noticed is that all the chicken products are gone from grocer shelves, while other meats are left untouched. One of the reasons why chicken costs less is because of corn. It takes two pounds of corn to produce a pound of chicken, as opposed to four pounds for other meats.

That means that chicken producers may be able to increase prices at a slower rate than a pork or beef producer. This may benefit beaten down companies such as Tyson Foods (TSN:NYSE), which has great exposure to chicken. But don't risk the house. Tyson is no longer a pure play on chicken. When Tyson bought IBP it also became a processor of pork and beef.

For further diversification - usually a prudent measure - consider these food stocks, as well.

Monsanto Company (MON), a leading producer of genetically modified seeds (GMO) is betting that the food crisis will create a market for GMO. After turning itself into a $5 billion agribusiness with 20% profit margins and a stock price up more than 1,000%, it's now moving to feed the world.

At the UN food summit in Rome, the company announced goals to boost global food production, while pledging to double corn and soy yields by 2030. And it says it'll distribute seeds to African farmers, royalty free. Other GMO companies to consider are Origin Agritech (SEED).

Fertilizer stocks are cashing in on rising demand for food, including Agrium (AGU), CF Industries (CF) and Mosaic (MOS). There's also Sociedad Quimica (SQM), which has a supply of potassium nitrate, a cheaper fertilizer alternative.

Or, to make or save even more money, do what my wife and I do before grocery shopping. Clip coupons.

Good Investing,

Ian L. Cooper


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