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Food: Taking a Bigger Bite Out of Your Pay
New York: November 21, 2011
By John Stephenson

The US economy appears to be turning the corner, with recent readings indicating that it is gaining steam as factories churn out more cars and slowing inflation boosts spending power. The increasing strength of the US recovery may help to buffer the economy from a gathering storm over Europe . Consumers regained a little spending power as weekly earnings rose in September and October, helping boost retail sales. But behind the positive headlines, rising food prices are taking a bigger bite out of our incomes and further exacerbating rising income inequality.

After adjusting for inflation, the incomes of the top one percent of the US population rose by 275 percent from 1979 to 2007, according to recent study by the Congressional Budget Office. At the same time, the income for the middle class grew by just 40 percent. Making matters worse, intergenerational mobility in the US is now considered poor by global standards and college enrolment from families in the lowest quartile is falling while that from the richest is rising. And while food prices have risen for all, it's the lowest income quintile where the impact is the most significant.

The United Nations population division has pegged the world population at 7 billion and forecast that by 2050, the world will have 9.3 billion people. More mouths to feed around the world, coupled with changing diets and slumping grain stockpiles have conspired to drive food prices higher. As incomes rise, and globalization spreads western tastes across emerging markets, consumers demand more meat relative to grains such as rice or wheat. It takes some 2,000 pounds of grain to feed a person for a year if used as feed for livestock, but just 400 pounds if consumed directly.

While raw food prices can gyrate widely as news of droughts in key growing regions cause grain prices to spike, prices at the retail shelf are much less volatile. Because raw ingredients make up as little as a fifth of the final selling price at US stores, commodity prices for grains have little bearing on the price we pay. Cushioning the blow for consumers are the less volatile components of packaged food; namely processing, transporting and retailing. Retail prices were impacted this year by Midwest flooding, low livestock inventories, and disruptions in Japanese fishing, all areas that are likely to see improvement in the future.

The outlook for consumers looks decidedly better over the coming year. While we are in the throes of a food price spike at the grocery store, the upswings tend to be milder and shorter than those in other commodities. Retail prices for food normally peak and trough some six months after the turning points have occurred for raw food. And with world raw food prices levelling off in 2011, consumers should start seeing a similar moderation in retail prices by the beginning of the New Year.

With Europe 's debt woes continuing to weigh on markets and signs indicating that US lawmakers will fail to reach an agreement to cut the budget deficit, the markets are likely to remain volatile. Investors can play the global super cycle by investing in the companies that produce and distribute fertilizers, since fertilized food grows twice as fast as unfertilized food. Another way for investors to benefit from the rising price of food from farm to table is through the grocers. For the first time in a long while, grocers have pricing power and they're boosting food prices to consumers. Increasing earnings and a record of steady dividends are two good reasons for investors to consider boosting their portfolios with a few well-chosen grocers.

Long-time readers will begin to notice a change in my newsletters and website over the next couple of months. In an effort to better brand myself, I am in the process of converting Money Focus to an E-Letter that will be called John Stephenson's Strategic Investor and will become to be consistent with my Facebook, Twitter and YouTube posts. I trust that you will bear with me during this change.

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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