No investor with an eye on the economic climate can ignore this summer's ballooning food prices. Withering weather has shot the cost of consumables to near 2008's levels, when food riots broke out in select countries in response. Unfortunately, this trend won't cease anytime soon: With a burgeoning global population demanding ever-increasing amounts of food, the world's economy could face a disaster.
The summer harbinger
This summer's numbers are staggering. Maize and wheat prices soared 25% from June to July. Soybeans rose 17%. Beef is up 6% year over year. The farther you travel from the United States, the worse it gets: Sub-Saharan African nations experienced insane price spikes of more than 100% in some instances.
Jumping food prices might put pressure on consumers in the U.S. or other high-tech, first-world countries. While major spikes often don't put a considerable dent in U.S. consumer pockets, they could still cause grousing among retail grocers across the country. The food crisis won't start here in the safety of a strong economy, however. The developing nations will be the first ones crushed.
Consider China. Leaping food prices pushed consumer prices up more than 3.5% in March alone, driving inflation and threatening the welfare of the nation's hundreds of millions of poor citizens. In a country expected to assume its reign as a top global economy, weakening consumer power will put a quick halt to any dreams of a blossoming Chinese middle class. That translates to a bad growth prognosis for major corporations peddling their wares to middle-class Chinese customers.
Other developing nations with rapidly growing populations expected to drive future economic growth will further feel the pinch. It's easy for citizens in the U.S. or Western Europe to overlook food prices when they spend 20% or less of their income on consumables, but citizens of the developing world frequently hand over 50% or more of their incomes on food. It's tough for these developing countries to even think about a middle class in such context.
Winning in a losing environment
Some companies can indeed flourish in a food-price-induced economic crisis, however, and a little forethought can go a long way for an investor.
Take megaseed producer Monsanto (NYSE: MON ) and fertilizer specialist CF Industries (NYSE: CF ) . Socially minded investors may abhor the former's tactics depicted in the documentary Food, Inc., but the need to feed the world will only increase with time. An estimated 2 billion people around the world face malnourishment at today's production and demand levels. With global food demand predicted to double by 2030, someone will have to feed all those hungry people.
Monsanto's efficiency-minded approach to seed production -- the company boasts net margins greater than 15% and nearly 17% quarterly revenue growth year over year -- will answer the future call for food. The company does a great job planning ahead as well, developing drought-resistant seeds to handle future environmental upheavals. Similarly, CF and other nitrogen-based fertilizer corporations can produce vast quantities of fertilizer from cheap natural gas. CF fuels crop growth while sporting a net margin of more than 27% and nearly a 37% return on equity.
Other winners could include farm machinery manufacturers, such as Deere (NYSE: DE ) . Exploding food demand will spark the need for greater supply, and machinery capable of handling vast production will grow increasingly valuable as the crisis grows. Strong and steady Deere already boasts a wealth of experience in agricultural manufacturing. The company's largest division took in revenue of nearly $24 billion in 2011. Even in the uncertain climate of the drought that has brought its stock down, Deere has still managed respectable year-over-year quarterly revenue growth of more than 14%.
Others aren't so lucky
The losers aren't happy stories. While I'm skeptical of some scientists' claims that the world will need to go vegetarian to combat declining water availability, water shortages will certainly put a damper on Tyson Foods (NYSE: TSN ) and other meat distributors. Given that producing a kilogram of animal protein takes nearly 100 times the water of a similar amount of grain protein, farming plant products will become considerably cheaper. The drought has already knocked Tyson's stock to near 52-week lows, and future water shortages could indeed leave the company's stock high and dry.
Watch out for ethanol producers, as well -- that's you, Valero Energy (NYSE: VLO ) . The company processed 403 million bushels of corn last year for an average of 3.4 million gallons of ethanol a day. An explosion of corn prices during the drought forced the company to shut down two ethanol plants in June, however. With agencies like the United Nations pushing the U.S. to suspend ethanol mandates for cars in light of spiking food prices, future crises could put ethanol's profit viability in jeopardy.
The future of food is on the line
There are ways to avoid this coming economic calamity, but governments and corporations alike will need to address swelling food demand eventually. Spiking prices and unavoidable natural occurrences like the drought will contribute to a crisis without preventive action. As an investor, you'll need to watch the trends to get ahead of the curve -- before any future food shortage comes to pass.
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