Coffee, sugar and cocoa prices could rise by up to 1,000% by 2014 because of a combination of shortages and loose money policy in the developed world.
This is the bold prediction of commodities fund manager Aaron Smith, quoted on Bloomberg yesterday.
I have been bullish on food commodities since last year, when it became clear that inflation would become a defining feature of the global economy.
The chain of events is relatively straightforward…
After a big wobble in U.S. stock prices midway through last year the Bernanke Fed committed to injecting $600 billion into the U.S. financial system…
Instead of lending this money into the U.S. economy, as the Fed intended, U.S. banks used this money to chase down global profits…
As a result, much of this non-interest bearing cash found its way into food commodities…
This policy-led price inflation, combined with genuine rising demand across the emerging economies and freak weather conditions, triggered a “super bull” in the agriculture sector…
For exactly these reasons, consumer-focused stocks started to dip.
Again, the reason is relatively simple.
Inflation in the emerging economies—most notably in China, India and Brazil—has caused central banks there to raise interest rates. Higher interest rates act as a drag on growth because they constrain the amount of credit available in the economy. Fears of a slowdown in growth have pushed many investors out of the emergings and back into U.S. stocks.
Think of it as a seesaw. As the prices of food and other commodities rise, the prices of consumer-focused stocks drop.
Put simply, the best way to invest in emerging market growth right now is to buy stuff that people need (like food, oil, steel, copper) not stuff that people want (such as gadgets, travel, nicer cars).
One of the most basic of basics, of course, is food.
To break it down to its simplest level, food is in a bull market because supply can’t keep up with demand.
As commodities expert Smith put it to Bloomberg yesterday, “There’s a tremendous shortage of food, there’s a tremendous shortage of arable land. Any kind of food products are going to increase.”
On the demand side, according to the United Nations, world food production will have to increase by 70% over the next 30 years to meet rising demand from a growing world population (which is projected to grow by 2.2 billion people over the same period).
This, of course, is a humanitarian story first and foremost. According to World Bank president Robert Zoellick rising food costs have pushed 44 million more people into poverty since June of last year.
The harsh reality is that the world’s poorest are affected most when food prices rise. It’s not fair. But it’s unfortunately the reality we live in.
Ben Bernanke should leave his ivory tower from time to time. If he did, he might think twice before printing up boatloads of speculation-generating cash…
How YOU Can Help Solve the Global Food Crisis
Fortunately, there is a way to help solve the global food crisis: invest in companies dedicated to improving crop yields and supplying the world with much-need fertilizer.
The easiest way to do this is through an exchange-traded fund called the Market Vectors Agribusiness ETF (NYSE:MOO). This ETF gives you exposure to publicly traded companies worldwide that derive at least 50% of their revenues from the business of agriculture.
I first recommended MOO to readers of International Living Investor at the start of November (China Is Running Out of Farmland… Here’s How to Play It). Since then, shares in MOO have risen 9.6%.
MOO took a big hit following the recent panic selling caused by the earthquake in Japan. But it has risen sharply since then.
If you bought and sold, it’s time to buy back in. If you haven’t yet bought, it looks like a great long-term investment.
This is not speculating on higher food prices. It’s helping solve the problem of higher food prices.