If you just look at the data, inflation has been non-existent since the economic recovery begun around five years ago. And while official estimates of inflation have been pretty tame, it hasn’t exactly felt that way when it comes to our wallets. Prices for food continue to soar as a variety of factors have pushed up prices for raw ingredients.
Unfortunately, those prices are estimated to keep on rising throughout 2014.
Luckily for investors, there are plenty of ways they can profit from rising food costs and essentially hedge what they put into their grocery carts.
A Hidden Rise
According to the Labor Department’s latest measure of the consumer price index (CPI), inflation rose only 0.1% in February to reach just 1.1%. That’s the smallest yearly gain in almost five months. While at first blush that may seem like a reason to jump for joy, it hides a sinister and potentially big problem for consumers. Namely, rising food costs.
The drop in wholesale energy prices managed to mask a 0.4% increase in the cost of food. That jump upwards was the largest gain in the prices of meat, fish, dairy and vegetables since September of 2011. Beef prices alone managed to increase 4% in February- the most in nearly 10 years. The culprit has been the hard-felt droughts in California and the unusually cold weather in other key growing regions around the nation. Higher prices for corn and other commodity crops have trickled down throughout the agriculture value chain. That’s caused overall food prices to rise about 1.4% since the beginning of the year.
Unfortunately, the effects of those droughts and uber-cold weather will continue to wreak havoc on consumer’s wallets in the near future.
According to the U.S. Department of Agriculture's (USDA) latest estimates, we could be in for a rough 2014. Estimates for the agency's all-food CPI show that food price inflation will rise by as much as 3.5% throughout this year. That amount is roughly in line with historical norms. However, the USDA didn’t account for the recent drought problems in California in its estimations and only included “normal” weather conditions. As California grows the vast majority of our fruits, vegetables and other crops, the continued problems of the drought could have "large and lasting effects” on food prices.
All in all, the 3.5% rise could seem like a drop in the bucket as the year goes on.
Stocking Your Portfolio's Grocery Cart Now
The potential for rising food inflation is an issue that hits close to home. Luckily, investors don’t have to take it lying down. There are plenty of ways to “hedge” and potentially make a few bucks on the trend. One of the best could be the PowerShares DB Agriculture ETF (NYSE:DBA).
The fund tracks a basket of popular agricultural futures- including corn, wheat and cattle- and is an easy way to directly bet on rising food prices. So far, DBA has managed to capture the upside in rising Ag prices this year and will be a bigger winner if the USDA’s forecast comes true. The only downside is that investors will receive a K-1 statement at tax time. In order to avoid this, the ETN structured UBS E-TRACS CMCI Food TR ETN (NYSE:FUD) could be used to bet on rising Ag commodity prices.
While DBA can be used to form a nice base-holding in terms of playing rising agricultural commodities, investors looking for more “oomph” may find it in the duo of coffee and livestock. Both commodities have surged this year as the weather’s effects have taken hold. The way to play their continued rise is through the iPath DJ-UBS Coffee ETN (NYSE:JO) and iPath DJ-UBS Livestock ETN (NYSE:COW).
For investors with a long term focus, Ag-based equities could be a better play as the recent food issues highlight an extended problem- rising demand and falling supplies. To that end, the Market Vectors Agribusiness ETF (NYSE:MOO) could be a great buy. The ETF tracks 53 different firms across the entire agriculture value chain. These include industry stalwarts like St. Louis-based biotech company Monsanto (NYSE:MON), Moline, Ill.'s John Deere (NYSE:DE) and Decatur, Ill. food processor Archer Daniels Midland (NYSE:ADM). The $3.5 billion fund has managed to put up an impressive performance over the last five years. Overall, MOO has returned 16.10% annually.
The Bottom Line
While core-CPI inflation measures have been tame, the overall picture is scarier when it comes to food. Prices at our grocery store continue to rise. What’s more, they are predicted to rise further in 2014. That means it could be time to bet on the agriculture sector. The previous picks- along with the broad- PowerShares Global Agriculture (Nasdaq:PAGG) -make ideal plays.