How Investors Can Tackle Food Inflation

Policymakers across the globe are jittery as rising food prices are thwarting their attempts to get a grip on headline inflation. With so many supply constraints, the situation is getting even murkier, and there's no quick fix in sight.

But is it going to be all that bad when you look at the investment side of it? Is it possible to find profits in this scenario as an investor?

If case you don't know why you should, the Food and Agriculture Organization's April 2011 Food Price Index showed a steep jump of 36% from year-ago levels, indicating the trend is here to stay for some time. Time to build an arsenal.

The story so far
Rising demand for food in maturing markets coupled with dwindling food reserves and geopolitical tensions in the Middle East and North Africa are generally to blame here. While this picture looks generally grim in the short term, with mouths to feed increasing at an alarming rate each year companies in the food business are sure to use this opportunity to widen margins. For the Foolish investor who already has or plans to put money on them, this could be good opportunity to earn profits.

Food for investments
Global food processing is one area you can put your money on. Promising stocks here include Archer Daniels Midland (NYSE: ADM  ) , which converts raw agricultural produce like wheat and oilseeds into food products. About 91,000 tons of oilseeds are processed everyday to produce edible oil.

BRF Brasil Food SA (NYSE: BRFS  ) , a Brazil-based seller of meat and dairy products, is also a good company to invest in. It specializes in poultry and processed food products to more than 140 countries. Cashing in on the current trend of high food prices, this company is sure to see widening margins and a rise in net income.

CHS (Nasdaq: CHSCP  ) supplies to fewer countries than BRF Brasil but engages in production of a variety of agriculture products. CHS, which is owned by cooperatives, produces fertilizers to oilseeds and supplies for 60 countries.

Illinois-based Corn Products International (NYSE: CPO  ) has mostly industrial customers to which it supplies high fructose corn syrups, glucose corn syrups, and other industrial sweeteners used in packaged food products.

Among other areas in the food industry, you can look for green pastures in the farm equipment business. Faced with rising food prices, most economies around the world will look to increase production. AGCO (NYSE: AGCO  ) builds and distributes equipment like brand names in tractors such as Challenger, Massey Ferguson, and Fendt. In the farm equipment sector, the largest player is Deere (NYSE: DE  ) , which manufactures tractors, harvesters, tillers, and seeding equipment.

A Fool's take
These companies and similar ones represent a simple but very realistic way to take advantage of soaring food inflation and generally higher commodity costs. The world is getting bigger, and it's getting hungrier. These companies are some of the best ways to take advantage of that.

As always, before actually jumping onto these stocks, the Foolish investor needs to exercise caution with regard to the trend. Commodity markets are volatile and notoriously unpredictable. Do your own homework first.

Arunava De does not own shares of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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