11/16/2010 6:11 PM ET|
Why food bills are heading higher
The cost of a wide range of commodities has been soaring and will likely keep rising. You can't fight it, but with some smart investing moves, you can profit from it.
As if the job market weren't bad enough, we're all going to have to cope with higher prices for everything from cereal and coffee to clothing and beer.
The reason: a phenomenal spike in agricultural commodities this year -- from cotton and corn to sugar and wheat -- is making its way to store shelves.
In fact, you may be seeing them already -- and you're going to see more.
A basket of 86 items, mostly food, was up 0.6% in the past two months, according to the research group that conducted the survey, MKM Partners.
That may not seem like much. But it spells significant increases if the price hikes continue -- which seems likely given the global trends driving food prices higher.
The big trends: a rising middle class in emerging economies that wants to eat better; weird weather patterns around the globe; the growing use of ethanol to fuel vehicles; and a shrinking dollar that makes commodities look cheaper. "Agricultural prices are going to go higher, and much higher over the next decade or two," predicts famed investor Jim Rogers, chairman of Singapore-based Rogers Holdings.
Sounds painful, right? But as investors, we have a way to ease the discomfort: Buy the trend and make money from it. Here's how.
A long-term trend
First off, investors who want to buy agricultural commodities now should know that, after such a big run-up, there could be a correction over the next few months. Signs of more farmland coming online or better weather conditions could spark that pullback.
But Rogers is worth listening to about the long-term trends because he's been studying commodities and getting the calls right for years. As he has predicted, the prices of agricultural commodities from sugar and cotton to corn, wheat, soy and coffee all recently hit highs not seen in years, if not decades. "We are still very much in a structural bull market, which will play out for another five or 10 years," agrees James Dailey, the portfolio manager of the Team Asset Strategy Fund (TEAMX).
Investors can jump in by buying exchange-traded fund or exchange traded notes designed to track the price of commodities, like Elements Rogers Intl Commodity Agriculture ETN (RJA, news), right now, then wait for pullbacks in the coming months and buy more.
They can also play this trend with stocks; I'll have names in a minute.
First, let's look deeper into the reasons experts cite to explain why agricultural commodity prices will keep rising (albeit with plenty of volatility along the way).
1. The global middle class wants good eats
The U.S. and Europe have fueled growth in emerging economies for decades by purchasing lots of goods and natural resources. That's created a rising middle class that expects to eat better -- which often means more steak, pork and hot wings. Cows, pigs and chickens consume a lot of grain, so this trend pushes up demand and prices.
"We helped industrialize the emerging markets, and we moved a lot of people out of poverty into the middle class," says Jerry Jordan, the manager of the Jordan Opportunity Fund (JORDX). "Now they are consuming more grains either directly" or as food for livestock.
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