Agribusiness Stocks Are Soaring As Food Prices Hit All-Time Highs

| January 25, 2011 | 0 Comments

The United States Department of Agriculture just dropped a bombshell. They cut their production forecast for several crops.  It’s sending corn and soybean prices to their highest level in 30 months.

In fact, according to the UN’s Food and Agricultural Organization (FAO), food prices hit an all-time high in December.  Their food price index reached 214.7 last month.  It eclipsed the previous high mark of 213.5 it set back in June of 2008.

Don’t forget, in just the last year we’ve seen fires in Russia wipe out portions of their wheat crop.  Then droughts in Argentina hurt corn production.  And now flooding in Australia is compounding the problem further.

No doubt about it, we’re only a natural disaster away from a worldwide food shortage.

Remember, higher food prices hit developing economies the hardest.

Consider this, Americans spend about 13% of their income on food.  But only 20% of the food cost is from commodities.  The rest is made up of marketing, packaging, transportation, and profit for the companies who bring the food from the farm to the grocery store.

But in poorer countries, people typically spend 30% to 60% of their income on food.  And a much smaller portion goes to marketing and packaging.  It makes emerging market consumers much more vulnerable to rising commodity prices.

Simply put, this is a food crisis.

The last time food prices were this high, riots broke out in many of the world’s poorest countries.

We’ve already seen riots over food breakout in Tunisia and Algeria in the last month.  Protesters are throwing homemade fire bombs at the police. And the police are responding in turn.  More than 100 people have already been killed.

And it could get worse…

People are driven to do crazy things when they can’t feed themselves or their families!

Thankfully the FAO has been working with countries who were hit the hardest in the last food crisis.  Since 2008, they’ve been working with governments to boost their domestic food production.  So far their efforts are helping.  But there’s still a long way to go.

The key to the success of the FAO program is the modernization of farming operations.

That means governments, with the support of funding from the UN, are subsidizing investment in farming operations.  They’re funding increased investment in infrastructure, equipment, seed, and fertilizer.  They’re also making credit available and providing training for local farmers.

As a result, farmers in emerging markets have the ability to pay for high quality inputs.

That’s great news for the Agribusiness companies that make all of the equipment, seed, and fertilizer.  They should see emerging markets drive revenue and earnings growth for years to come.

I think we’re still in the early stages of a multiyear bull market in Agribusiness stocks.  They will benefit the most from rising food prices.

An easy way to get exposure to this industry is with ETFs.

The Market Vectors Agribusiness ETF (MOO) is the biggest of the bunch with more than $3 billion in assets.  MOO holds 47 of the world’s leading Ag business companies.  And has an expense ratio of 0.56%.

The bottom line is, food price inflation is front and center on the world agenda.  And the only long term solution is to increase production.  That’s great news for the long term growth of Agribusiness companies and a great opportunity for investors to cash in on higher food prices.

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Category: Commodities

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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