As the global economy begins once again to heat up, prices of various commodities are also beginning to rise. Long-term population increases coupled with booming economic growth in emerging markets are helping to support these asset prices. Funds such as the Market Vectors RVE Hard Assets ETF (NYSE:HAP) have become popular with investors looking to gain. However, while most of us take higher gasoline prices in stride, higher food prices are having a dramatic effect across the globe.
IN PICTURES: 7 Forehead-Slapping Stock Blunders

Crisis Levels
Global food prices soared nearly 25% in 2010, surpassing 2008 highs according to the United Nation's Food and Agriculture Organization (FAO). An index of 55 different food commodities created by the FAO gained for the sixth straight month exceeding its June 2008 record high. Countries that import much of their food, such as the Philippines, Mexico, Nigeria and Pakistan are feeling the brunt of the price increases. In 2008, skyrocketing food prices produced protests and riots in poor nations including Haiti, Somalia, Egypt and Cameroon. In India, the surging cost of onions has actually led to the overturn of local governments. In the short term, worries about inflation caused by various governments' quantitative easing and money-printing programs have caused investors to pile into commodities. Lower interest rates have also helped to reduce the opportunity costs in storing many food commodities. However, the short-term picture is still as bleak.

The FAO estimates that the world's population will increase by 2.3 billion people, to reach 9.1 billion by 2050. Global food production will need to grow by 70% to keep up with the population. Global grain production will need to increase 2% this year in order to meet demand expectations for 2011. However, these estimations don't even take into consideration the change in diets of the emerging global middle class. China and India have seen increased demand for processed foods with high sugar content. ETF Securities estimates that India's sugar consumption will double by 2030 and Chinese consumption will surpass that of the EU by 2014. Sugar demand will rise by as much as 50% in the next 20 years based on changing diets.

Hedging Higher Food Costs
Rising inflation due to food prices is certainly a cause for concern. The Chinese National Bureau of Statistics recently reported that surging food prices had contributed 74% of the country's year-on-year inflation, and General Mills (NYSE:GIS) recently announced it is raising prices on certain products to cope with higher commodity costs that hurt fiscal second-quarter results. Higher prices in agricultural commodities provide a clear signal that investment in agribusiness makes sense for a portfolio. Investors have plenty of choice in this area.

The PowerShares Global Agriculture (Nasdaq:PAGG) follows a basket of 40 different companies related to agriculture. Seventy percent of the fund's holdings are dedicated to foreign issues with fertilizer companies, such as Agrium (NYSE:AGU), representing the bulk of the sector exposure. Similarly, investors can use the Jefferies TR/J CRB Global Agriculture Equities ETF (Nasdaq:CRBA) as a broad play.

For direct exposure to the ag commodity pricing, the iPath DJ-UBS Agriculture ETN (NYSE:JJA) allows investors to bet on the prices of seven different ag futures including corn, wheat and sugar. In addition, higher prices have affected often ignore commodities such as cocoa and coffee. Both the iPath DJ-UBS Cocoa ETN (NYSE:NIB) and iPath DJ-UBS Coffee ETN (NYSE:JO) provide access to these assets.

Bottom Line
Fueled by both speculation and long-term demand, food prices are on the rise. After surging nearly 25% in 2010, this year shaping up to be another year of price increases. Investing in the agriculture sector makes sense for portfolios as a hedge against the inevitable price shocks at the grocery store. The proceeding ETFs along with companies like Deere (NYSE:DE) make excellent additions. (For related reading, take a look at Large Cap Agriculture Stocks For 2011.)

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

Related Articles
  1. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  2. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  3. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  4. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  5. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  6. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  7. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center