Rising Food Prices Series: Part III

Posted by Patrick O'Connor on 5/19/08 11:39 am

This post contains agricultural stocks that are in our top-ten holdings.

This article is the third part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: food production challenged in both developed and developing countries. In the following weeks, we will discuss other factors. Read parts I and II first.

Developing and developed countries are experiencing food production challenges

The U.S. Agriculture Department raised its forecast for U.S. food prices for the third consecutive month in May. With the latest increase of 0.5%, the forecast is approaching levels not seen since 1990, when food prices climbed 5.8%.

But that’s a small increase compared with those being seen in developing countries. This year in Indonesia, for example, the price for one kilogram of rice has risen from 3,500 rupiah (about 40 U.S. cents) to 5,000 rupiah, according to the U.N. Office for the Coordination of Humanitarian Affairs— a desperate situation for a nation where most people live on less than $2 a day. In fact, Nobel Laureate Economist Gary Becker has estimated that a 30% rise in food prices over five years would cause living standards to fall by 3% in rich countries and more than 20% in poor countries.

As noted earlier in this series, increased demand from developing countries such as China and India is being blamed for much of the recent rise in global food prices—but there are many other factors to consider. One is that both developed and developing countries are experiencing food production challenges—albeit for different reasons.

It’s easy to understand why developing countries would have trouble producing food: they tend to have underdeveloped technologies and inefficient economies. Questionable property rights, poorly developed irrigation systems, limited access to fertilizers and pesticides, and unskilled labor make crop production difficult, and impassable roads can present transportation problems.

But developed countries are also experiencing their own challenges. Although they generally have the knowledge, technology, and skills necessary to produce and trade crops successfully, they have been diverting their arable land and food crops to the production of biofuels, which are fuels derived from recently dead biological material, such as plants.

Perhaps the most notable case of this is the biofuel ethanol in the United States, which has been in the news a lot this year. Just last year, ethanol—which is made from sugar cane or corn, but most often corn—was being touted as a green fuel that could help nudge the country away from fossil fuel dependence. President Bush called it key to his strategy to cut gasoline use by 20% by 2010.

According to the U.S. Department of Agriculture (USDA), the ethanol industry is expected to consume 4 billion of the 12.1 billion bushels, or 33%, of the corn that U.S. farmers are expected to produce in 2008. That number is up from about 5% in 2000. (A similar situation is occurring with other biofuels. For example, 15% of the total soybean oil production is expected to go to biofuels this year, according to the USDA.)

As a result, there has been less U.S. corn available to feed the world, and that’s significant, because the United States exports 66% of the world’s corn. In response, the price of corn—one of the most ubiquitous ingredients in the food supply, used for everything from feeding livestock to making breakfast cereal—jumped nearly 30 percent in 2008.

The prices of other food staples have been affected as well. A dairy cow must eat around 10 pounds of corn daily in order to produce milk, and it takes six pounds of corn to produce one pound of beef. As a result, European countries have responded to the corn shortage by importing sorghum—a grain widely consumed by the world’s poorest populations—for livestock feed. Now sorghum prices have risen, from $95 per metric ton in 2004/2005 to $191 per metric ton in 2007/2008.

A similar situation is occurring with soybeans: In the United States, farmers who usually rotate corn and soybean crops have been so busy planting corn they haven’t planted enough soybeans, driving up the price of that staple as well.

Moreover, the situation is only expected to worsen, with the USDA projecting that U.S. farmers will plant less, not more, corn in 2008—86 million acres, an 8 percent drop from 2007.

As a result, a political battle is brewing in Washington, D.C. In recent weeks, food manufacturers and livestock producers have tried to undermine the country’s ethanol mandates, such as the requirement that the oil industry use 15 billion gallons of corn-derived ethanol by 2015.

U.S. Department of Agriculture Secretary Ed Schafer has responded by blaming rising food costs on other factors, including weather problems. We’ll discuss that factor in more detail in Part IV of this series.

Below is a list of Navellier agricultural companies that are top-ten holdings in our all-cap portfolios.

Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile

Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

To receive email updates from Navellier All Cap Blog, click here.

• 
• Email
• Print
• Comments (0)

No comments have been posted for this entry.

Post a Comment

You must register and log in in order to post comments.