Inflation Slams Food Prices

Note from Managing Editor Sara Nunnally: In response to Monday’s article on retirement and inflation, we received this letter from Smart Investing Daily reader N.H.

I was just reviewing some prices of a number of things circa 1934, when I was 5, and old enough to remember a number of them personally. By my reckoning, today’s dollar buys only about what six cents would buy then (on average). When it comes to hospitalization it’s about two cents, using comparable procedures, such as appendectomy or tonsillectomy. For those that are not concerned about inflation, pay attention.

Inflation is like another tax; one that many folks don’t even know they’re paying. It can takes years to see a big differences in prices. But lately, it seems like inflation is speeding up in certain areas. N.H. mentioned healthcare, where prices have certainly climbed out of control. But other areas are in food and energy prices — things that people buy every day.

Back in the 1930s, a dozen eggs went for 29 cents. Potatoes were a penny a pound, and a quart of milk cost you a dime. Today, those same items will cost you about $2 a dozen, 79 cents per pound, and about $1 per quart, respectively.

That’s some serious inflation, and things could get worse.

We’ve already seen governments overthrown because of skyrocketing food prices. This is the beginning of a global food crisis. That’s why I want to share with you part of Kent Lucas’ of Safe Haven Investor March Issue. He explains why food prices are so high, and what investors can do about it.

Read on…

Riots in the Streets! How the Global Food Crisis Could Feed You For Life

Are you prepared to pay three, four or even five dollars for a loaf of bread? How about five dollars for a box of cereal?

Better yet, is your portfolio prepared for the shake-up that lies ahead?

“The Great Food Crisis of 2011″ is here. I did not invent that hyperbolic phrase. That is what the highly respected magazine Foreign Policy is calling the rampant food inflation that is causing problems worldwide.

The British government just completed a two-year study involving 400 experts from 35 countries to assess the global food situation. The results are scary. See for yourself:

By 2050 global food supplies will not be sufficient to feed an expanding population. The UN estimates that food production must rise by 70 percent to feed a world population of more than nine billion in 2050. [But] rising demand and surging global population coupled with increasing resource conflicts over land, water, and energy will hamper food production.

The United Nation’s Food and Agriculture Organization (FAO) states that the “double whammy of high food prices and the global economic slump pushed an additional 115 million people into poverty and hunger.” Over 1 billion people go hungry every day and the figure is rising.

Why? It is a combination of factors. In part, Mother Nature is to blame. Couple a handful of devastating floods and a widespread drought with rising demand and the problem grows exponentially. The result is higher food prices that fewer people can afford.

The supply-and-demand economics suggest long-term imbalances. We have a real crisis when we combine the dismal long-term outlook with short-term supply shocks caused by the forces of Mother Nature and, arguably, climate change. It is time to be prepared.

Food Inflation Is Everywhere

Wheat prices are nearing all-time highs in Britain and France. Governments around the world are stockpiling grains. They are stashing away millions of tons of essential commodities to prevent social unrest and to attempt to contain inflation.

This buying frenzy is adding to the pricing pressure.

Countries across the globe, including the major wheat exporter Russia, have banned exports to control prices. But that is causing prices to rise even further as businesses and consumers stock up.

China has implemented serious policy and pricing measures to keep inflation under control and to keep its suffering rural citizens at bay. But Chinese insiders tell me “the natives are getting restless.”

Last year, with floods in China and Pakistan, food prices in Asia surpassed the extremes of 2007-2008. For example, the critical food staple rice shot up from $300/metric ton to $1,100/metric ton — a surge of over 250%.

The shocking stories are everywhere.

Here at home, we’re just starting to feel the pinch. But for most of the world, the pain and suffering is at extreme levels.

In many developing countries, the high cost of basic food staples is exceptionally dangerous as the world’s poorest citizens spend close to 75% of their miniscule income on food! A 15% increase in food prices is flat-out devastating to these regions.

(Don’t forget, you can sign up for Smart Investing Daily and to recieve all of regular editors Sara Nunnally and Jared Levy’s easy-to-understand articles.)

Riots in the Streets

“Bring us sugar!” was the chant by thousands of Algerian rioters just a few weeks ago. Sugar is a cheap, popular source of calories in many developing countries and the price of sugar is now at 30-year highs.

When I mention rioting, Egypt immediately comes to mind. But that country isn’t the first. Actually, more than 60 food riots have occurred in more than 30 countries in the past several years! And in the past few weeks, there have been government protests in Tunisia, Algeria, Morocco and Yemen — all in part because of rising food prices.

But when severe riots and protests bring down a country as relevant as Egypt, that’s different. When the situation in Egypt threatens Mideast stability and consumes our daily news, we know we have a problem on our hands.

The recent riots were not only about dethroning Hosni Mubarak, the 30-year president. The real catalyst was the poor standard of living and the leader’s reluctance to improve Egyptians’ daily lives. At the core of that discontent is, of course, food inflation.

And the same kind of anger is brewing in many other Middle Eastern countries. Who knows how far social unrest will spread in the Middle East? But the unsettled political climate in Egypt and in many other countries is worrisome and is likely to continue this year.

No End in Sight

Prices will rise even further in 2011. There is no relief in sight for food inflation.

The bottom line is the demand for food is rising faster than food can be produced.

That’s where this month’s Safe Haven stock pick comes in. This leading company represents a safe harbor during a raging storm. Its agricultural products are critical to increasing the supply of key crops, and its seeds and biotech chemicals help farmers grow larger and better crops.

The company is DuPont, or officially E.I. du Pont de Nemours & Company (DD:NYSE). DuPont has been around since 1802 and has evolved into the leading global science and chemical company. In a nutshell, DuPont makes the world a better, healthier and safer place through science, innovation and chemistry.

When it comes to solving the needs of rapidly developing economies, DuPont is very well positioned. The company gets 40% of its revenues from developing countries and just 30% of its sales from North America. Better yet, in 2010, developing markets sales grew 24%.

DuPont Will End the Food Crisis

DuPont’s agriculture & nutrition segment is the largest and most important. Essentially DuPont focuses on improving “global nutrition through higher crop yields and healthier foods.”

In the context of the food crisis, this business has potential for double-digit sales growth.

Within this segment, there are three key businesses that are tied to the global food supply: crop protection, Pioneer seeds, and land management (i.e. herbicides).

Essentially, DuPont provides high-yielding hybrid seeds, herbicides, insecticides and fungicides for critical crops such as corn, soybeans, cotton and wheat. Sales for this division were up 13-14% in the fourth quarter of 2010 with seed volumes up 25%, indicating a strong start to 2011.

DuPont spends close to 60% of its R&D budget on the agricultural & nutrition segment, which represents just one-third of sales. Yes, the research is complex, dealing with seed genetics and plant DNA, yet the spending shows the company understands the importance and opportunity regarding the future of food and that its products are critical to global agricultural viability.

Management’s financial commitment to this division tells me DuPont knows global food shortage risks are real and the “the Great Food Crisis of 2011″ is the start of a much bigger problem.

DuPont’s Critical Role

Weather plays a pivotal role in annual crop production, but it is also affected by fertilizers, biotech seeds and crop protection chemicals.

That’s where DuPont puts its focus.

Global product penetration is low and crop yields in the U.S. (where hybrids are commonly used) are usually much higher when compared to other countries. That tells us there is a lot of room for global yield gains through hybrid seeds and crop protection products.

As more farmers worldwide use these products global yields will rise. And as DuPont continually improves the effectiveness of these seeds, herbicides and insecticides, crop yields will rise.

That’s how the food crisis will get solved… eventually. Having fewer mouths to feed is out of our control in the short run. But using biotech seeds and certain chemicals is a proven (and safe) way to increase yields.

That is why I like DuPont as a global Safe Haven investment. It is at the center of the primary solution to the long-term food crisis. Demand for DuPont’s agricultural technologies will always be high.

Owning this stock is a great way to profit from the global food crisis, a serious problem that is getting worse, not better.

I hope you enjoyed this piece of Safe Haven Investor. The full issue is available online to subscribers.

Before I let you go, I wanted to tell you one other thing that Kent mentioned about DuPont…

He said, “The company has always paid a dividend — for 426 consecutive quarterly periods since 1904. And during the crisis of 2008, DuPont did not cut its dividend, which wasn’t the case for many other large, economically sensitive companies.”

Dividends are a big part of Kent Lucas’ investment philosophy. They are a great way to boost your portfolio gains just by being an investor.

Learn more about Kent Lucas and Safe Haven Investor.

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