What Cheaper Food Means for Your Portfolio

For those outside the farming sector, crop prices aren't something many people pay much attention to. But a huge move yesterday in the prices of some popular food items could have big implications for the global economy -- as well as the investments you have in your portfolio.

The latest on food
Yesterday, the U.S. Department of Agriculture gave its final report on the harvest in 2011. With the news that the U.S. had a whopping 844 million bushels of corn in surplus storage -- nearly 100 million more than had been expected -- grain prices plummeted. Corn futures finished down their maximum daily limit of $0.40 to $6.11 per bushel in early morning trade Thursday.

The carnage wasn't limited to corn. Wheat fell sharply, posting a near-6% loss by the end of trading at the Chicago Board of Trade. Soybean futures also dropped almost 3% in the first hour of trading yesterday.

Why it matters
The prices that Americans have paid on food have been rising substantially in recent years. In 2011 alone, the cost of staple meats like ground beef and turkey rose more than 10%. Groceries from milk and ice cream to potatoes and apples also jumped double-digit percentages last year.

But when crop prices fall, it has a cascading impact throughout the agricultural economy. Consider these second-order effects:

  • Falling farm income hurts ag suppliers. When you look at tractor maker Deere (NYSE: DE  ) , you'll notice that sales at the company have risen more than 23% in just the past year. That's due largely to more money in farmers' wallets, which enables them to buy more equipment.
  • Lower prices give less incentive to improve crop yields. Fertilizer companies love boom times for crop prices because it makes their products worth more in terms of their benefit to farmers' bottom lines. If crop prices fall, Terra Nitrogen (NYSE: TNH  ) should see less demand for its nitrogen-based fertilizers than it previously expected -- hurting prices and eventually profits.
  • Crop-buyers do better. One challenge that poultry company Tyson Foods (NYSE: TSN  ) and food processor Archer-Daniels-Midland (NYSE: ADM  ) both share is that high crop prices have raised their input costs, forcing them to pass higher prices through to customers and to cut their own profit margins. Lower crop prices give those companies some relief on that score.

And those are just some of the most obvious impacts. Over the longer haul, prices affect decisions on which types of crops to plant, which can lead to future challenges in matching food production to demand. As food prices for consumers fall, their higher disposable income supports the businesses that provide more discretionary purchases to their customers.

How to play cheaper food
Some crop-related ETFs actually give you a chance to get direct exposure to prices without having to dabble in the dangerous futures market. Teucrium Corn (NYSE: CORN  ) , for instance, owns corn futures contracts covering several different months, thereby avoiding at least some of the issues that have proven to be the downfall of other commodity ETFs that use futures.

But the ag-related plays described above, while not directly related to crop prices, do a good job of giving you exposure to the space. An alternative is to look at food-buyer stocks -- companies like restaurant stocks Brinker International and P.F. Chang's. Restaurants typically have a big portion of their overall costs come from food expenses, so trimming unnecessary expenses on the food side should help those companies bounce back from tough conditions.

Take care of yourself
Food prices aren't as critical for most Americans as they are in other, less prosperous parts of the world. But by staying aware of the implications of falling food prices, you can position yourself to take maximum advantage -- and to avoid some of the pitfalls that may lurk in your portfolio.

As nice as falling crop prices may be in the near term, it's hard to see such a trend lasting very long. If you'd prefer stocks that you can stick with for the long haul, please accept my invitation to read the Fool's latest special report. Inside, you'll find revealed three stocks to help you retire rich. It's absolutely free, but it won't be around forever, so click here and read it today.

Fool contributor Dan Caplinger likes his corn popped. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. 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 Fool's disclosure policy keeps you fed.

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