Regina Leader Post, Canada
07-14-07
Get ready for era of rising food prices
Kevin Johnston, Special to The Leader-Post
Since I live on an acreage and my friends and neighbours are either ranchers or
farmers, I am always following agricultural commodity prices.
Last week, Peter Brabeck, CEO of Nestle, the world's largest food company, said
that a "significant and long-lasting" era of rising food prices is upon us.
Brabeck blamed the increased use of grains and sugar as "biofuels" and
increased demand from India and China as the two major factors driving prices.
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Brabeck said recent rises in food prices are not only temporary, but also long
term with structural changes in supply and demand.
Brabeck's comments are among the starkest warnings about a long period of
rising food process I have heard to date.
Corn prices have increased about 60 per cent and wheat about 50 per cent over
the last 12 months. Sugar, milk and cocoa prices also surged, prompting the
biggest increase in retail food prices in three decades in some countries.
Statistics Canada says consumers in the country paid 3.8-per-cent more for food
in April 2007, compared with the same month last year.
A study released in May from Iowa State University shows increased prices for
ethanol has already led to bigger grocery bills for Americans.
In the United States, ethanol is made from corn unlike a country like Brazil, which
uses sugar cane. However, U.S. corn also feeds chickens, hogs and cattle,
which means a rise in prices for meat, eggs and dairy.
In Mexico last year corn tortillas doubled in price. In Canada, the fallout will not
likely lessen as our government committed $2 billion in incentives for ethanol
made from wheat and corn.
As of November 2006, 107 ethanol biorefineries have been built in the U.S., with
the capacity to produce 5.1 billion gallons of ethanol per year. It is estimated that
by May 2008 another 56 refineries will be constructed producing an additional 3.8
billion gallons of new capacity.
Growth in the United States is similar to Canada and is being driven by financial
incentives that naturally exist when oil prices are over a certain level.
So if we are bullish of grains and ethanol, the best way to take advantage of
rising prices for both is to buy Archer Daniels Midland (ADM:NYSE).
The Decatur, Ill.-based company engages in the procurement, transportation,
storing, processing and merchandising of agricultural commodities and products.
Clearly, the market for grains and seed processing will swell as global growth in
biorefineries and higher demand for protein in countries, like India and China,
continue.
Food price inflation is running at six per cent in China, 11 per cent in India.
So where does this leave investors? Ethanol and higher agricultural commodity
prices are good for companies like John Deere, Potash Corp. of Saskatchewan,
the Mosaic Company, Saskatchewan Wheat Pool, and Archer Daniels Midland.
I would buy them and sell shares of food processing companies like Kellogg,
Nestle, Hershey and PepsiCo that are getting squeezed by rising commodity
prices such as sugar, corn, milk and cheese.
The Jones's bought 3,000 shares of Archer Daniels Midland this week at $35.14
US. Our one-year target is $42 US a share.