Prepare Your Portfolio For Higher Food Costs

By Aaron Levitt | August 31, 2010 AAA

Analysts estimate that we will be paying more for our morning cup of coffee in the near future. The planet's population is expected to grow from 6.8 billion to 9.1 billion by 2050 and the United Nations' Food and Agriculture Organization predicts that a growing worldwide middle class is expected to create an increased demand for more varieties of food. In order to keep up with this exponential demand, the world's food producers will have to increase food output by nearly 70%. Long term, higher food prices are almost assured as the world's population is expanding.

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Bullishness for the Ag-Complex
Population growth and rising global incomes are having a dramatic effect on the demand for food. Annual grain demand is increasing, as both food and livestock feed is likely to reach three billion tons by 2050. Production of cereals would need to grow by almost a billion tons to meet this goal. Similarly, farmers would need to raise an additional 200 million tons of livestock to reach the estimated 470 million tons by 2050.

Ag-economists at the U.S Department of Agriculture predict that this increase demand will hit our wallets as well. The consumer price index for food is projected to increase 2-3% from 2010 to 2011. Retail food prices in the United States are expected to rise faster than overall inflation through 2012. (To learn more, see All About Inflation.)

Citizens in the United States will spend nearly $1,618.7 billion on food in 2019, an increase from the $1.139 billion spent in 2009.

Getting the Upper Hand
Over the short term, food prices tend to swing based on weather conditions, disease and pests. With more mouths to feed, the demand for food and agriculture products will help put upwards pressure on prices. But investors do have several choices to participate in the long-term rally in agriculture.

Ninety-percent of the growth in crop production is slated to come from higher yields and increased cropping intensity. BHP Billiton's (NYSE:BHP) recent $38.6 billion bid for Potash of Saskatchewan (NYSE:POT) highlights the growing fertilizer market. Equal gains in crop production will come from better irrigation and seed varieties. The Market Vectors Agribusiness ETF (NYSE:MOO) offers investors an overall arching play on the agribusiness sector. The fund follows 46 different companies devoted to agriculture equipment and chemicals including a 10% weighting to potash.

Following a basket of eleven different agriculture futures contracts including corn, wheat and sugar, the PowerShares DB Agriculture (NYSE:DBA) is a way to play the direct pricing of these products. Similarly, the UBS E-TRACS CMCI Food ETN (NYSE:FUD) offers exposure to many of the same commodities. These funds can be used as broad long-term plays on the Ag-complex.

The USDA estimates that there are approximately 100 million heads of cattle in the United States. This estimation is lowest amount since the USDA began keeping records in 1970s. Increased demand from Russia and parts of Asia, combined with poor production in the U.S., has helped cattle futures jump 11% since July. The iPath DJ-UBS Livestock ETN (NYSE:COW) and UBS E-TRACS CMCI Livestock ETN (NYSE:UBC) provide access to cattle and lean hog futures.

Coffee prices have risen nearly 34% through the year as crops from Colombia and other nations in Central America were plagued by disastrous weather. In addition, concerns about the validity of Brazil's upcoming crop have also helped buoy prices. The iPath DJ-UBS Coffee ETN (NYSE:JO) gives investors a way to participate in that market.

The Bottom Line
The agricultural market represents a good long-term investment for a portfolio. Increasing population sizes, coupled with growing demands for new and better sources of food from rising middle classes around world, will certainly lead to price increases. Investors would be wise to allocate a portion of their portfolio to that area. The iPath DJ-UBS Cocoa ETN (NYSE:NIB) as well as the proceeding funds make ideal choices for a portfolio.

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