Quantitative easing causes rampant inflation! Global climate change destroys entire harvests! Unrest in the Middle East drives oil prices higher!
Lately, it seems a variety of factors are all conspiring to push prices on key commodities into the stratosphere. But this isn't just "cost-push inflation" – inflation caused by a supply shock like unrest in the Middle East. Even with high oil prices, new car and truck sales in the U.S. were up 20% in the first quarter, and China, one of the world's biggest commodities importers, saw its GDP grow 2.1% in the same period.
But how can investors capitalize on this seeming boom in global commerce? Trading oil or cotton futures isn't for the faint of heart, and most stocks are only connected to certain commodities, not the whole complex. However, there is one industry that benefits from the growth of global trade, one industry that represents the very poster child of the word "industry": railroads.
Actually, this is your grandfather's railroad
The First Transcontinental Railroad was authorized by Abraham Lincoln in 1862 and built by Union Pacific Railroad
Today, Union Pacific, CSX
How uranium relates to T-shirts
A small part of what has driven oil prices so high is the recent move away from one particular alternative -- nuclear. The problems with Japan's Fukushima Daiichi plant have spooked countries like China and Germany into shutting down plants or delaying plans for new ones. While nuclear power represents a relatively small percent of global energy needs, those needs will have to be shifted elsewhere, mostly toward coal, oil, and natural gas.
This works out well for the railroads, for two reasons. This should bolster the historical trend that almost 47% of new energy production over the last decade has come from coal. Greater coal needs will translate into greater profits for rail companies that transport the stuff, such as Union Pacific, CSX, and Norfolk Southern
Meanwhile, increases in oil prices have driven demand for corn, which can be converted into ethanol. Close to 40% of U.S. corn production is used for ethanol, versus about 7% 10 years ago. This has the effect of pushing prices up on many other basic commodities as well. Cotton, for example, is now so expensive that Hanesbrands
Farmers are trying to capitalize on these high crop prices by planting as much land as they possibly can this year, the second-highest-planted corn acreage since 1944. That will create an enormous harvest that will need to be shipped, again, putting the railroads to position to grow their profits.
This won't be a one-off year, either. Long-term trends like global population growth and growing middle classes in developing countries will continue to push demand for key commodities higher. China, for example, is the world's largest importer of cotton, and the U.S. is the largest exporter. As its middle class grows, demand for clothes and other luxuries, such as a broader diet including meat, will also increase. Analysts believe that global crop production will need to nearly double over the next 40 years just to keep up with demand.
A looming threat
All of this means that railroads, and railcar manufacturers like American Railcar Industries
Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Canadian National Railway is a Motley Fool Stock Advisor pick. 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.