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Farmers' Almanac
New York: January 17, 2011
By John Stephenson

Food prices have soared to record levels globally, raising alarm bells about an impending food crisis. Already, sugar, oilseeds and grain prices have exceeded the levels they reached in 2008, when rising food prices sparked deadly riots from Haiti to Somalia . According to a recent report by the United Nations Food and Agriculture Organization (FAO), meat and sugar prices have now advanced to records.

Poor grain crops in Russia , Ukraine and Canada are partially to blame for the continued rise in world food prices. Also to blame are soaring energy prices, the American corn-based ethanol program, whacky weather and surging demand from growing Indian and Chinese middle classes, which have all conspired to push food prices higher.

Dry weather in Argentina , a major producer of soybeans, helped push December prices for soybeans higher, while flooding in Australia helped move wheat prices up 17 percent in the month. Corn prices jumped 11 percent in December as yields were revised downward by the U.S. Department of Agriculture. Sugar has reached a 30-year high, while coffee prices surged to a thirteen-year high and canola prices rose 43 percent in 2010, raising fresh concerns about food price inflation.

And this may be just the tip of the iceberg. According to the FAO, global food production will need to increase by 70 percent between now and 2050, as the world\\\\\\\'s population expands to 9.1 billion people from the current 6.8 billion. Global grain outputs will have to rise at least two percent this year to meet the demand in 2011-12 and to avoid further depletion of global grain stocks.

Despite strong grain crops in many regions of the world, particularly throughout the developing world, decreasing production from farmers in the developed world have left a gap of more than five percent between global demand and supply. That gap will need to be filled by carryover stocks, which for corn, are at fifteen year lows. Today, some 29 largely poor countries in the developing world are facing food shortages and are in need of external food assistance to feed their citizens.

But with tight global grain stocks and record high prices, food companies such as Kellogg, Sara Lee, Kraft, General Mills and ConAgra Foods have stopped discounting food products and have started to raise food prices across the board. Last December, Kraft Foods raised its price on its Maxwell House and Yuban coffee brands throughout the U.S. as coffee prices soared to 13-year highs.

Further complicating matters is America \\\\\\\'s corn-based ethanol mandate, which has diverted nearly 36 percent of the country\\\\\\\'s corn crop toward ethanol production. High oil prices, pressure from environmentalists and concern over energy security have prompted the U.S. government to pass the Energy Independence and Security Act , which mandates that 36 billion gallons of biofuels—or fuel from food—must be added to gasoline by 2022. In America , the biofuel of choice is ethanol, a type of grain alcohol made from corn. When blended with gasoline, ethanol is supposed to increase the octane level of the fuel and reduce the carbon monoxide emissions that cars produce.

In mid-October, 2010, the U.S. Environmental Protection Agency announced that it had approved the use of E15, a blend of 85 percent gasoline and 15 percent ethanol for use in vehicles built in 2007 or later. As farmers gear up to produce even more corn for ethanol production, farm acreage for soybean production is being shuttered forcing Brazil, a soybean producing powerhouse, to chop down some of its environmentally sensitive rainforest to meet the surging soybean demand globally.

America \\\\\\\'s ethanol program makes little sense from either an energy or environmental standpoint, but it makes excellent political sense. The U.S. farm lobby is extremely powerful, and all U.S. presidential primaries begin in Iowa , the third biggest corn producing state. Ethanol is highly corrosive, necessitating special pipeline and transportation equipment to move it from the field to the city. In fact, a move to increase ethanol blending in gasoline to 20 percent or higher is not possible with current engine technology, as a higher proportion of ethanol will damage and corrode engine parts. Researchers at Cornell University have found that it took 29 percent more energy to convert corn into ethanol than the fuel actually produced. And researchers affiliated with Princeton University found that due to expected land-use changes, the widespread use of corn-based ethanol could result in twice the greenhouse gas emissions of the gasoline it would replace.

For the Western consumer, price hikes for food are a major annoyance—pinching an already tight budget. But in the developing world, where food expenditures can account for as much as 80 percent of household budgets, they are a disaster. And rising food prices are translating into accelerating inflation in the developing world, a circumstance that could threaten to derail the global economic recovery.

Inflationary pressures in fast-growing countries such as India , China and Brazil could pose a serious threat to their continued rapid economic expansion that has led the global rebound. Countries, such as China , are now trying to stamp out inflation by indirect means such as raising the reserve requirements for banks. If these indirect methods prove inadequate, countries may be forced to raise interest rates to stamp out inflation, a move that could spark slowdowns in both developing and developed countries.

Tight grain stocks, changing diets and whacky weather have combined to make agricultural investing one of the most solid investment themes for 2011. To feed a hungry planet, farmers will need to boost crop yields. And the quickest way to boost a given field\\\\\\\'s yield is through fertilization, since fertilized fields produce between 50 and 100 percent more grains than unfertilized fields.

With corn prices elevated and American farmers salivating at the prospect of even higher corn prices in the future, investors should look to the great nitrogen-based fertilizer companies to boost their portfolios. With strong demand for corn for ethanol and feed for animals and people, corn prices and nitrogen prices are likely to move steadily higher.

Food inflation is, once more, front page news. While sticker shock may be the order of the day at the supermarket, your investment portfolio could benefit from a boost from a sector that offers the most compelling fundamentals of all of the commodities. Low stocks, strong demand and whacky weather will make an investment in agricultural stocks a winning bet.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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