Many consumers have recently felt the effects of rising oil prices in their wallets. With turmoil continuing to rage in the Middle East, oil prices have skyrocketed past the $100 a barrel mark. Funds like the United States Brent Oil (NYSE:BNO) have rallied in the face of higher prices. Analysts predict that this trend of higher oil prices could continue for awhile as the political situation in the Middle East remains in a quagmire. However, while consumers focus on the gas in their tanks, a potentially more serious problem is still brewing - rampant food inflation.

TUTORIAL: How To Analyze Earnings

Biggest Increase in Thirty-Six Years
Consumers are facing their biggest challenge in higher food prices. According to the Bureau of Labor Statistics, wholesale food prices leaped nearly 3.9% last month. This is the biggest price increase in more than 36 years. As cereals, dairy and meat all showed prices increases, the United Nations Food and Agriculture Organization (FAO) measure of world food prices also hit a record in February.

So far, consumers in the United States have not felt the effects of this rising food price inflation. The all-food CPI only increased about 0.8% between 2009 and 2010 or the lowest food inflation rate since 1962. However, the problem lies in the future. Recent weather calamities such as a drought in Russia and flooding Australia, have disrupted harvests and helped push food prices higher. In addition, long term demand from emerging nations for new sources of food and biofuels is putting continued pressure on food prices. The USDA estimates that throughout 2011, its all-food CPI will increase 3 to 4%, with food at home (grocery store) prices forecast to rise 3.5 to 4.5%. The USDA forecasts are based on strengthening global food demand, mostly in the developing world.

Emerging World Demand
That demand in the emerging world is growing quite rapidly. The FAO projects that global populations will increase nearly 11% by 2020 and 20% by 2030. Analysts at Goldman Sachs expect the global middle class to expand considerably over the same time frame, to over 3.5 billion by 2030. Worldwide demand for beef is at all time highs, with beef exports surging by 19% in 2010. Wheat imports in China will need to rise by more than 30% this year. Last year, China was a net importer of corn for the first time in 14 years. Unlike developed nations such as the United States, citizens of emerging nations can spend as much as 40 to 50% of their income on food.

Sowing the Seeds
With the trends pointing in the favorable direction, investing in agriculture has been a big hit. Ag sector funds have received about $2.6 billion worth of new money through February. While many agricultural commodity prices have climbed already, investors with a long term focus should consider adding the sector to a portfolio. Both the Market Vectors Agribusiness ETF (NYSE:MOO) and the PowerShares Global Agriculture (Nasdaq:PAGG) offer broad global exposure to some of agriculture's biggest companies like Deere (NYSE:DE) and fertilizer maker Agrium (NYSE:AGU). These two funds can form a great base in sector. However, there are other ways to play the growth in Ag.

The agricultural sector accounts for a big portion of total economic activity in both New Zealand and Argentina. Argentina is the second largest corn exporter and third largest soy exporter in the world. The nation is also top beef and lamb producer. New Zealand has seen its milk exports to China rise more than five times since 2008 as rising incomes increase demand. Both the iShares MSCI New Zealand (Nasdaq:ENZL) and Global X FTSE Argentina 20 ETF (NYSE:ARGT) should do well as the Ag sector grows.

Higher beef prices may be here for awhile as it takes two to three years for a cattle rancher to substantially increase herd. The U.S. currently has the smallest cattle herd since the 1950s, even though exports are surging. The iPath DJ-UBS Livestock ETN (NYSE:COW) and UBS E-TRACS CMCI Livestock ETN (NYSE:UBC) allow investors to bet on the prices of livestock.

Bottom Line
With global demand surging, higher food prices are here to stay. Investors with long term timelines should consider the sector. Growing populations, coupled with the newly minted middle classes desire for new sources of protein makes the sector a great place to be for the next few years. Funds like the new IQ Global Agribusiness Small Cap (Nasdaq:CROP) should continue to do well as global populations increase exponentially. (For additional reading, check out The Impact Of Rising Coffee Prices.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  2. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  8. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!