We’ll see how this land grab has the potential to cause long term food price shock.
First, let’s look at the problem of food prices even before the land grab.
An orange from our grove. Could orange be better than gold?
A December 17, 2012 Fortune article at www.finance.fortune entitled “What about food inflation, Bernanke?” by Nin-Hai Tseng shows the problem.
Here are excerpts: The Federal Reserve wants to prioritize jobs over inflation. How will Americans feel about that when they’re paying more for groceries next year?
In an unusual move, the U.S. Federal Reserve last week signaled it would put its focus on jobs ahead of inflation next year by buying up billions of dollars worth of bonds until the unemployment rate falls to at least 6.5%.
But while the Fed moves on with its bond bonanza assuming rapidly rising prices won’t be a problem, or at least not any time soon, it will be hard to convince shoppers at the grocery aisle.
It’s true overall inflation has been mild thanks in part to lower prices across gas stations nationwide. The seasonally adjusted Consumer Price Index dropped 0.3% in November from October, the Labor Department reported Friday. This comes as gas prices saw the biggest drop in nearly four years, falling 7.4%, during the same period.
Food prices are telling a different story, however.
The producer price index, which tracks how much wholsesalers pay for goods, fell 0.8% in November. However, the price for food rose 1.3% — the biggest increase since February 2011, according to a report released Thursday by the Labor Department.
Producer food prices are up 2.6% from a year earlier, compared with an annual gain of just 1.5% for all goods. In particular, chicken prices have surged 14.3% during the last year and wholesale beef and veal prices rose 8.2% in November, the biggest monthly gain since 2008.
For months, the US Department of Agriculture has warned about higher food prices. Next year, U.S. consumers may pay 3% to 4% more for food, the agency forecasts. The price of beef may rise as much as 5% amid tighter supplies of corn, which is used to feed cattle. Since June, the price of grain, the country’s biggest crop, rose by more than 50%.
A growing growing global population calls for growing supplies of food.
Investor interest in agricultural commodities has been spurred over the past decade by the rise in global population.
The world population has risen from 3.2bn towards 8bn in the 75 years and is projected to reach 9-10.5bn by 2050.
A 2011 study by the University of Minnesota suggests that global food demand will double by 2050.
Source Iowa State University: 2011. (click on photo to enlarge).
This chart by from Iowa State University shows how agricultural demand will rise in three different ways. Starting in 1966 the bottom line estimates the increase in food demand. The middle line shows how calorie consumption has increased by 23% since 1966.
The top lines shows what will happen to food demand by 2050 if people in China and India eat as much meat and dairy per person that was being consumed in the US and Europe in 1966.
Interestingly if you live in North America, this land grab is thousands of miles away in Africa.
The Financial Times reported in the September 2012 issue that $83b would need to be invested in agricultural in developing countries.
This need clashes with the need to reduce intensive farming that depletes soil and water and big agriculture business that puts a huge chunk of the world’s population out of work.
In the Economist article, “Land scramble jeopardizes years of agricultural investment” by Irungu Houghton, Pan-Africa Director, Oxfam, Nairobi, Kenya he wrote: The scramble for land is the latest challenge to Africa’s development. More than 50m hectares of Africa’s productive agricultural land, equivalent to an area the size of Kenya, have been turned over to foreign investors for biofuel and food exports in 10 years.
Driven by cash-rich countries, western agribusinesses and equity firms, the trend threatens to reverse the progress being made by many African governments to modernise agriculture and support the livelihoods of millions of small farmers. For a continent in which 40 per cent of its people barely gets enough to eat, this is scandalous.
When presented with the facts last year, Africa’s highest legislative body, the Pan-African parliament, was so alarmed that it called for a moratorium on all new large-scale land acquisitions until laws and policies have been put in place to regulate land and water use.
This land grab by the Pan-African Parliament may have good ethical and long term social underpinnings. However it could turn out to no good as well depriving both the small farmer and emerging markets a huge source of arable land.
The Western world is no longer immune to inflationary forces from the emerging world. If there is a food shortage… emerging countries will compete right along with the industrialized nations.
Three Ways to Beat Rising Food Prices
The basic answer is obvious… hedge your investments again rising food prices by investing in food.
#1: Create all or part of your own food. Our business associate, webmaster (and son in law) has done this. Our recent post “Water the Roots” examines this idea. Read this post at 13 reasons to own a farm.
#2: A second way is to invest is in food related ETFs
One Agricultural ETF is the Market Vectors Agribusiness ETF (MOO).
Five year share price chart of MOO.
Market Vectors Agribusiness ETF tracks the DAXglobal Agribusiness Index and aims to invest 80% or more of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness.
Here is the current main investments in MOO shown at www.finance.yahoo.com. (See link below).
The poor performance of MOO… a share price down 4.57% over five years in a sector strongly supported by rising revenues is suggestive of a build up in value.
I won’t invest personally in this type of ETF as I dislike the idea of investing in GMO and chemical companies. However I feel obligated to show you all possibilities.
Another way to use ETFs is by investing in ETFs & ETNs that invest in agriculturally based commodities using futures.
These are not perfect hedges because there can be differences between commodity prices and “real life” food prices.
The following ETFs offer this potential.
PowerShares DB Agriculture Dble Long ETN (symbol DAG). This ETN is 200% Leveraged (Double Long) focused equally on Wheat, Corn, Soybeans.
Dow Jones-UBS Grains Total Return Sub-Index (symbol JJG). This unleveraged ETN invests solely on grains, currently Corn, Soybeans and Wheat.
AB Svensk Ekportkredit MLCX Grains Index Tracker (symbol GRU). This unleveraged ETN invests in Wheat, Corn, Soy Meal and Soybeans.
iPath DJ-UBS Agriculture TR Sub-Index (symbol JJA). This unleveraged ETN is more broadly invested commodities such as Soybeans , Corn, Wheat, Coffee, Soybean Oil, Cotton and Sugar.
PowerShares DB Agriculture Fund (symbol DBA). This is an unleveraged ETF with broad exposure to agricultural commodities. The base index weightings are: Soybeans, Live Cattle, Sugar #11, Corn, Coffee , Cocoa, Lean Hogs, Wheat, KC Wheat, Feeder Cattle and Cotton.
AB Svensk Ekportkredit ELEMENTS Rogers Intl Commodity Agri ETN (symbol RJA). This unleveraged ETN invests in a broad commodity index compiled by well know investment analyst Jim Rogers.
These ETFs again are fixed to big agri business which many of our readers dislike (as do we) so the first alternative (grow your own food) or the alternative below are more environmentally sensitive.
For more details on ETFs contact Morgan Hatfield an investment adviser at Ruggie Wealth at firstname.lastname@example.org
#3: Do as I have done… buy some food producing real estate.
I like this option because I can use Bio Wash to make the land less pesticide and chemical intensive… hopefully eventually free.
Plus our experience in agriculture has been quite good.
Our farm and home for multi dimensional living.
We just harvested our third crop and it looks better than last year.
The year we took over the grove there were 1,500 trees and they produced 1801 boxes of oranges.
We removed one third of the lower producing trees in a grove management plan. We sprayed the remaining 2/3rd with Bio Wash.
With 500 fewer trees, the grove produced 2,484 boxes of oranges that year!
So we doubled the Bio Wash spray and the next year harvest was over 3,400 boxes still with a third less trees than we started.
We increased the spray again and this year and the harvest looks even better. I’ll know shortly and will report.
Plus like food prices… the price of oranges has risen. Our first year we received $8.50 a box. Last year prices rose to $10.20 and this year our grove manager is talking of $12 to $14 a box.
We have planted 500 new trees so this should add quite a boost beginning in two more years.
Each time I visit the super market and am hit by sticker shock… I just remember these facts and it makes the high cost of food a bit more digestible.
During these times of rapid change it is hard to rely on old social economic promises. This makes any certainty increasingly more valuable. One reliable fact about humans is we have to eat!
As food prices rise… you can hedge this inflation by investing in food in one of the three alternatives above.
Join us to learn about multi currency investing… investing in agriculture and multi dimensional real estate in the USA and Ecuador at our February 1-2-3, 2013 Super Thinking + Investing and Business Seminar.
Read FT article Land scramble jeopardizes years of agricultural investment