Rising Food Prices Series: Part V

Posted by Patrick O'Connor on 5/19/08 11:56 am

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

This article is the fifth 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: rising energy prices. In the following weeks, we will discuss other factors. Read parts I, II, III and IV first.

How rising energy prices are driving up the cost of foods

From the mid 1980s through September 2003, the inflation-adjusted price of a barrel of crude oil trading on the New York Mercantile Exchange (NYMEX) was around $25. By August 2005, prices had risen to $60 per barrel, and on May 22, 2008, they reached an all-time high of $135.09.

This spike in oil prices is forcing up food prices in two ways. First, it is driving up the price of nitrogen fertilizer, which many farmers depend upon to nurture a good crop. That’s because natural gas is a key component of nitrogen fertilizer production. According to the Oil Depletion Analysis Centre, the price of fertilizer has more than doubled in the past few months. For example, the fertilizer DAP, which cost $398 a ton last year, now costs $1,000 a ton, according to Arkansas-based Oakley Fertilizer.

Another problem presented by rising oil prices is increased transportation costs. Today, it costs more than ever to truck food from farms to local markets and ship it abroad. For example, in April 2007, it cost $60 per ton to ship grain from the Gulf Coast to Japan and $38 per ton to ship it to Europe. Today it costs $110 a ton to ship that grain to Japan and $75 a ton to ship it to Europe—83% and 97 more, respectively.

These rising fuel prices are affecting global food prices in a number of ways. Perhaps most obvious, the rising cost of producing and transporting food is being passed onto consumers. But in response to rising fertilizer prices, some farmers are choosing to plant soybeans instead of corn, because soybeans use less fertilizer. This is depleting corn supplies, which are already low due to biofuel diversion, as explained in Part III of this series, and forcing up both the price of both corn and the livestock that feeds on it.

In response, many people are calling for a decrease in dependence on oil—but in many cases, the use of alternative fuels only exacerbates the problem. As we explained in Part III of this series, the push to produce biofuels as an alternative to hydrocarbons is straining already-low food supplies, especially in the United States, where ethanol subsidies have diverted farmers from growing corn for food.

Rising oil prices are causing problems in the least likely of places. For example, bread lines have formed in Egypt, the world’s largest importer of wheat, despite the country being surrounded by petroleum-rich neighbors. Since the beginning of April, at least 10 people have been stabbed to death while waiting in line in Cairo, and others have died of exhaustion. That’s because Egypt is not awash in oil dollars as many other Middle Eastern nations are, and almost half of the Egyptian population survives on less than $2 a day.

Moreover, according to FOX News, United Nations World Food Program (WFP) documents show that OPEC nations are refusing to help their Arab neighbor. The WFP has asked for $750 billion in food aid to help manage the global food crisis. The United States leads all donors, pledging more than $1 billion. Middle Eastern countries, however, have not been so generous. Saudi Arabia has pledged nothing for 2008, and the United Arab Emirates has pledged just $50,000—several times less than the amount pledged by the impoverished Bangladesh. As a result, in Egypt, the Army has been called out to bake and distribute bread.

It is important to note, however, that rising energy prices are not the only problem. Egypt heavily subsidizes the sale of flour so that it sells for about $3 per 100-pound bag (a price that rises to $45 on the black market). While it seems that this would help, not hurt, the global food crisis, trade restrictions, in the long-term, are doing more damage than good. We will examine that issue in more detail in our next column.

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

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