When choosing emerging market plays, make sure you factor in the effect of rising food prices on the local economy

The mainstream media has cast the riots in Tunisia and Egypt as purely political.

But behind the headlines lies a shocking truth. One that has huge implications for emerging market investors.

Just as bad harvests in 1788 triggered the French Revolution, food price inflation lies behind the mass demonstrations in Tunisia, Egypt, Yemen and beyond.

It was no coincidence that the protests across North Africa were triggered by the self-immolation of Mohamed Bouazizi, a Tunisian fruit vendor who was protesting against police confiscation of fruit and vegetables he was trying to sell on the street.

The United Nations reports that its food index has broken the all-time highs reached in 2008. According to the U.N., the price of cereals rose 39% last year. The price of oils and fats, meanwhile, rose 55%.

The fact is—Egyptians are running out of food.

Bread, beans and rice—all staples for Egypt’s 80 million people—are in critically short supply.

Now, I don’t need to tell you that when people are hungry, social upheaval is sure to follow.

There are three main drivers for higher food prices:

• A growing population – The world’s population is growing by 73 million people each year. Each one of these new mouths needs to be fed. And each one of them steps up demand pressure on the world’s food supply.

• The rise of the emerging middle class – About 95% of this population growth is happening in the emerging world. As people in the emerging world get richer, they eat more meat. This puts extra pressure on the grain supply, as it takes up to 5 kilograms of grains to produce 1 kilogram of meat. Also, as the emerging economies grow, millions of people move from the countryside to cities. As cities grow, the amount of available farmland shrinks. This increases supply pressures.

• Climate destabilization – As the world’s climate heats up, governments are doing more to try to reduce the buildup of carbon in the atmosphere. One solution is biofuels. These use up corn and sugar supplies, driving up prices. Also, climate destabilization is leading to freak weather, in particular droughts, floods and hurricanes. These freak weather events—such as the recent droughts in Russia and the late rains in Argentina—are wrecking crops and severely limiting the amount of food we can produce each year.

But spiking food prices are also happening against the backdrop of Ben Bernanke’s money printing operation, aka QE2.

What happens when trillions of newly digitized dollars are pumped into the system?

People start to fear inflation. And when people are fearful of inflation they buy hard assets that will rise along with the rising tide of liquidity.

Gold and oil are well-known inflation hedges. But investors are also turning to agricultural commodities to protect their wealth.

Bernanke is doing what central banks do best. He’s blowing bubbles to try to keep stock market prices afloat.

Bernanke says he’ll turn off the money spigots as soon as he sees a big uptick in inflation. But how can he when he insists on measuring inflation by the movements of the Consumer Price Index, which leaves out food and energy prices from its mix?

As you can see from this chart of the PowerShares DB Agriculture Fund (NYSE:DBA), which tracks some of the most liquid and highly traded agricultural commodities, food prices have been on a tear since Bernanke hinted at further money printing by the Fed on August 27 last year.

How to Play It…

My favorite way to play this situation—and help the world solve its food crisis—is by investing in agribusinesses that help farmers increase crop yields.

This is why stocks of fertilizer companies like The Mosaic Company (NYSE:MOS) and Potash Corp Saskatchewan (NYSE:POT) have been on fire lately.

Don’t ignore food price inflation. It is having a profound effect on the emerging world. And it will continue to dominate emerging market stock prices for years to come.

When choosing emerging market plays, make sure you factor in the effect of rising food prices on the local economy. Countries with large poor populations will suffer most. So will countries that rely on food imports.