According to the Consumer Price Index (CPI), the cost of food in the U.S. increased 6.5% in the first 11 months of 2008. That’s the highest jump since 1990.
In 2009, the U.S. CPI for food is expected to increase 3.5% to 4.5%, as the high costs of commodities and energy are passed on to consumers. Within this statistic, both what’s called “food-at-home” and “food-away-from-home” prices should increase at about the same rate. This means that the cost of eggs, dairy, and poultry will likely continue to rise, as well as prices on the menu at your favorite restaurant. (See also: “Glorious Food Stocks.”)
A rise in food prices like this is typically the result of a harvest shortage. But this has not been the case. This time, production frequently has fallen short of consumption, resulting in a drawdown of inventories. The days of demand coverage for corn and wheat, for example, are bordering on three-decade lows. At current inventory levels, corn and wheat are vulnerable to supply disruptions.
In recent years, growing demand from emerging economies has contributed to production shortfalls. Developed countries annually consume more than 66 pounds of beef per person, while emerging countries like China and India annually consume 12 and three pounds, respectively, per person. The potential for growth is remarkable. And remember that higher meat consumption will result in a higher demand for grain.
Due to growth in the alternative energy sector, this is another area where demand for agricultural commodities has risen. Elevated oil prices and uneasiness about the stability of oil-supplying countries have caused energy consumers to look for other sources to meet long-term energy needs. Sugar, corn, wheat, and soybeans are all commodities that can be used to produce ethanol and bio-fuels.
These unexpected demands may cause the current agricultural commodities price cycle to last longer than it has in the past. And while we are feeling the food price crunch here in the U.S., other countries are feeling it, too…
China’s food prices ballooned in 2008, and some countries like Morocco, Turkey and Russia have even slashed tariffs on food to try to stay one step ahead of the rising prices. (See also: “Top 10 Stocks for 2009.”)
So what does this so-called “agflation” mean to us as investors?
It means that now is the time to invest in consumer staples companies in the world. There is and always will be a need for food, even when the prices soar. And with their solid fundamentals and a strong customer base, the following two companies are the best opportunities to take advantage of higher food costs.
Stock #1
Even with the U.S. economy in trouble, ConAgra (CAG) is one company that should benefit from this trend in 2009. CAG is the leading branded food company with some pretty familiar products, including Healthy Choice, Chef Boyardee, Egg Beaters, Hunt’s, Orville Redenbacher, PAM and Banquet.
I’m betting that a number of these brands can be found in your cupboards and refrigerators. CAG’s consumer brands can be found in 96% of U.S. households. The company has also expanded its reach to outside of the U.S. with its international food segment supplying 40 global brands to 110 countries, including Canada, Mexico, Japan, and China. Buy. (See also: “Is This the End of Money“?)
Stock #2
J.M. Smucker (SJM) is a quiet family-run business that has grown for over 108 years to become a leader in the consumer goods sector. It is the leading marketer and manufacturer of fruit spreads, peanut butter, shortening and oils, ice cream toppings, sweetened condensed milk and health and natural foods drinks.
Some of its other brands include: Crisco, Pillsbury, Hungry Jack, Robin Hood, Eagle Brand, Smucker’s and Jif. Conservative Smucker’s has $327 million in cash and equivalents, and a dividend has been paid annually since 1949.
The current P/E is reasonable in light of the company’s 7%, five-year earnings growth. Over the last 60 months, you’ve averaged nearly 24% a year on your conservative, family-run Smucker’s. “With a name like Smucker’s, you have to be good.” Buy.
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