What happened to the 99 cent burger? If you have a house full of teenagers, you know firsthand about the effects of inflation.
Food prices have skyrocketed as emerging market countries demand more food, steadily increasing their caloric intake in the middle of a population growth spurt. This, along with some of the worst years for weather and natural disasters, has consumers' stomachs growling.
One way advisors are making lemonade out of the high price of lemons is to look to agriculture-related exchange-traded funds (ETFs). Fund flows are increasing as advisors up their commodity allocations via the growing list of "Ag" ETFs.
Nature's Effect On Agriculture Prices
Today's harvest projections don't measure up to the levels that people want to consume. The U.S. Department of Agriculture has cut its harvest projections for corn, soybeans and wheat, adding fuel to the commodity-rally fire.
Corn prices shot up 69% last year as production in the U.S. dropped 4.9% on bad weather, which will leave U.S. inventories at their lowest level in 15 years, on top of an already-low global inventory.
Coffee was up 65% last year, reaching its highest level in 13 years. Two-thirds of the world's supply comes from just three countries: Brazil, Vietnam and Colombia. Unfavorable weather conditions have impacted production, which resulted in the depletion of U.S. coffee reserves to the lowest point in a decade.
Wheat prices jumped 47% during a year when the winter wheat acreage was the smallest since 1913. Surging worldwide demand and bad weather have both contributed to reductions in yield estimates. The U.S. Department of Agriculture slashed its forecast for global wheat production in 2010 and 2011. Production has been hampered by severe drought in Russia (which caused the country to ban exports of the crop), hot weather in Iowa and the EPA's recent decision to raise the ethanol blend rate.
After a record harvest in 2009, U.S. soybean production fell in 2010, causing a 44% increase in prices. The tightness in supply resulted in a 25 million bushel drop in estimated inventories.
Warnings from the U.N. about the threat of drought in countries such as China, the world's largest wheat producer, have an impact on prices as well. In the end, it all comes down to two primary things: too little rain in Russia and South America, and too much rain in Australia and India.
Population Increase Boosts Demand
Concerns about a food shortage are becoming a reality. The world's population is quickly expanding; it's projected to surge to 9.1 billion by 2050. The United Nations' Food and Agriculture Organization expects the growing middle class to consume a more diverse variety of foods. The U.N. says the world will face a food price shock, and agricultural commodity prices are likely to rise further. There is nothing indicating we have reached a peak; prices could continue to rise well into 2012. Agricultural products such as wheat, corn, vegetable oil, dairy products, sugar and meat are all at risk.
The rising middle class around the globe is creating increased demand for agriculture products and taking commodities to new highs. Often with an improved income comes greater demand for a protein-rich diet, which requires more corn that's used to feed livestock. As a result, the demand for non-staple foods such as dairy and meat are inflating the international food bill. World food producers would have to increase production by almost 70% to meet that increasing demand.