The Smart Profits Report Issue #517
Thursday, April 24, 2008
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report Food Prices Are Rising And Panic Is Around The Corner On February 19, I wrote a lighthearted column about inflation at the grocery store, as evidenced by rising chocolate pudding prices. But what a difference two months make. Today, it’s no joke. If you think filling up your SUV is an inconvenience at $117 oil, you ain’t seen nothing yet if this food situation gets worse. The World Bank says food prices across the globe have rocketed higher by more than 80% over the past three years – a situation that could plunge 100 million people into poverty. The price of rice in Asia has tripled over the past year. Bakers are reporting that flour prices are up as much as 200% for the year. Global wheat supplies are at the lowest level since World War II and there is a worldwide shortage of rye grains. So what are the reasons for this increasing food shortage? Rising fuel costs and a weak dollar contribute to the inflation. But two other highly influential causes are... The global population is steadily increasing, leading to more demand. But at the same time... ... a greater portion of land is being set aside to grow crops for biofuels. While the aim is to increase energy resources and reduce harm to the environment, it means there is less land to grow other key crops, which has led to a shortage and a consequent supply-demand crunch. I know this all sounds pretty gloomy, which isn’t typically like me. But having seen store shelves in South Florida emptied in less than 24 hours as a hurricane approached, I know what can happen when panic grips consumers. And if people are concerned that they may not be able to afford to feed their families a few months from now – or even worse, that food simply won’t be available – stockpiling will become the national pastime. High Food Prices + Food Shortage = Media Frenzy To make matters worse, this is the kind of thing the media drools over. Many outlets have latched onto the food shortage story because of its major public interest and critical nature. And if there is a legitimate crisis in America, the frenzy could begin to feed (pun intended) on itself. You can be sure that the media, while calling for calm, will run with the story for all it’s worth and ignite it even more. Expect to see television segments featuring panicked shoppers buying 20-pound bags of rice, making you wonder if you should be doing the same. And if the food shortage never materializes, the media will try to keep you scared and glued to your TV, radio, newspaper and Internet for signs that we’re running out of food. As investors – and smart ones at that – there are better ways to handle this news. Not by grumbling or stockpiling, but by profiting from the trend. Three Companies That Could Beat The Growing Food Prices As an investor, I want to stay away from the big food producers. While food companies like Kellogg (NYSE: K) and Kraft Foods (NYSE: KFT) are typically seen as safety stocks, I’d avoid them. The rising price of raw materials will likely impact their margins and although they will try to pass as much of that to consumers as they can, there’s only so much they can do and it might only partially offset the higher costs. If the situation gets really bad, I wouldn’t be surprised if the government stepped in and temporarily capped the prices these companies can charge. As much as we like to think we’re a free market society, the minute things get nasty, Big Brother tends to ride to the rescue. Just ask Bear Stearns and JP Morgan. However, there are companies that could see a big boost in business if the above scenario occurs. Firms like Costco, BJ’s Wholesale (NYSE: BJ) and Wal-Mart usually have lower prices than the typical grocer. The idea of buying in bulk more cheaply will appeal to consumers – especially if they adopt more of a stockpiling mentality. Even if shoppers don’t go crazy and purchase huge bags of grain, the idea of having a few extra boxes of Wheat Thins around may be comforting. Keep a close eye on this story. I hope I’m wrong, but it could turn out to be the most important issue of 2008. Marc Lichtenfeld
SPR Archive | 
