According to Raj Patel, author of Stuffed and Starved: The Hidden Battle for the World Food System, there are five main reasons for the high food prices:
- Food production is heavily dependent on fossil fuel and oil prices are soaring.
- Biofuel production is boosting prices.
- As nations get richer, they demand more meat, shifting grain "out of the bowls of the poorest people into the stomachs of livestock."
- Poor harvests may be the front end of climate change.
- Speculation on food prices fuels spikes.
Soaring oil prices are a main reason as food production is dependent on fossil fuels. In addition, higher fossil fuels encourage alternative energy solutions which includes biofuel production such as ethanol. Rather than providing food for people, fields are being used to produce biofuels such as ethanol. Some people have criticized subsidies for ethanol for encouraging hunger and global warming.
In addition, as the global boom continues, and as nations get richer, nations start preferring more meat. According to worldwatch.org, it takes an estimated five pounds of grain to produce a single pound of beef.
There is also a growing trend as the global food crisis continues where countries with a surplus, such as China, Cambodia and Egypt, have imposed policies that discourage outflow of surplus rice to conserve supplies for domestic consumption. According to an article by Lala Rimando, some exporting countries are holding on to their stocks waiting for the time to unload when prices go further up.
How do we play this Trend?
The most direct way continues to be the agriculture plays. Companies such as Monsanto (MON), the biotech of seeds, Potash (POT), the fertilizer company, and Deere (DE), the farm equipment company, stand to profit.
This trend will most likely continue to be a multi-year trend, and the agriculture sector appears to be a good play.
What about Fast Foods and Restaurants?
Demand for meat will increase, but that also means that the cost of food and meat will increase. But what will rise faster? Demand or the cost of the underlying food product? Let us wait and see what will happen.
Some people propose and suggest that people go vegetarian because of this crisis.
But will this be a widespread phenomenon?
It would be a good idea to keep track of the health food companies, companies such as Hain-Celestial (HAIN) and Whole Food Markets (WFMI). In general, people will start to be more health conscious and this is good for the health food companies.
Do you have any stock ideas or thoughts on this long term trend? Please do comment.