This Summer's Best Investment - FOOD!

A sampling of NACs analyst gathered recently to enjoy a traditional Memorial Day cook-out. While there was a deliberate effort to avoid “shop talk” and focus our chatter on sports, family and summer vacation plans, the discussion inevitably melted down to a late evening patio summit replete with laptops, note pads and a energetic and at times dire assessment of a future trend. The subject was food prices and the causative object that launched it was a humble can of Pork and Beans. It was observed that as recently as 2009, a shopper could find Memorial Day weekend sales which offered three cans of ‘P & B’ for $1.00. It was then observed that for Memorial Day 2011, those merchants who continued this traditional offering had replaced the once traditional 15.75 ounce can with a slimmed down 11 ounce container. It was then noted with some nostalgic lamentations that this popular summer food staple had realized a 30% inflationary cost increase in just two years.

The discussion turned serious when all realized that a confluence of events in America and around the world are indicating possibility the sharpest upward spike in food costs which could have a greater impact on consumer spending than the recent spike in petroleum prices.

At the core of this concern are some toned-down but potentially catastrophic crop status reports from the USDA. Assuming the ever-worsening news regarding corn and wheat crop harvests for 2011 is less than a worse-case scenario, food costs based on these staples are certain to see double digit inflationary increases before year’s end.

On May 23^rd the USDA warned of a “poor” to “very poor” winter wheat harvest for North America due to a drought during the growing season. Further complicating matters is a wet spring which has delayed both the harvesting of the winter crop and long delays in plating the year’s second crop. The same meteorological conditions have likewise impacted wheat production in Europe.

The price of wheat futures on the Chicago Board of Trade are currently trading at nearly 80% above year ago levels. The only nation poised to possibly benefit is Russia where unusually favorable conditions are forecast to increase wheat yields by 30%. But it is unclear if the Russians bounty will be shared with other nations. Chronic shortages and under production have created a political resistance to exporting Russian wheat and some analysis claim the crop itself is likely to be of poorer quality than what is the custom on American and European tables.

More dire than wheat is the possibility of a massive failure of the 2011 American corn crop. The same heavy rains and flooding in the Midwest which has lead to problems are now impacting corn. On May 22^nd the USDA echoed concern in reporting that in Ohio, less than 18% of the state’s corn crop had been planted due to millions of acres of soggy muddy fields. Overall , 18 states are reporting on average 20% or more of their annual seed corn has yet to hit dirt as farmers wait anxiously for the fields to dry out. Meanwhile many areas of already planted corn in the lower Mississippi Valley were accidently drowned due to flooding, or intentionally sacrificed as in Louisiana where over a million acres of sprouted corn was destroyed when flood gates were opened to stave off a potential downstream disaster in New Orleans.

While there is still potentially ample remaining growing season in North America, it is generally desirable to have corn crops planted by mid May so the plant can tassel and begin seed formation before the traditionally hotter and drier months of July and August. With corn already trading at near record levels above $7 per bushel, the prospects of $10 plus bushels remains a solid possibility and a near certainty if there are further delays in planting. There is widespread agreement that $10 per-bushel prices for corn will have significant impact on nearly all foodstuffs and major impact outside the food segment of the economy.

$10 per bushel corn would be the final coffin nail for the domestic ethanol fuel program which has already been decimated by the constant increases in corn prices. Most of the corn destined for human consumption makes its way into the food chain via the preferred alternative to cane sugar; High Fructose Corn Syrup. $10 corn would result in double digit increases for all products with HFCS and significant surges in prices for items like soft drinks, candy and sweetened cereals. The impact will also have a dramatic effect in the meat aisle.

Nearly all corn grown on the flat expanses of the Delmarva Peninsula is consumed by the regions poultry growing industry. Unlike the Midwest, Delmarva farmers have enjoyed ideal planting and growing weather so far. Unfortunately, they will not benefit from the short term spikes in corn prices since most pre-contract with the areas major poultry farms at a fixed rate. None-the-less at least one major poultry producer was quoted recently as saying they plan to cut back on the number of chicks placed with growers who raise the birds to market size and also to focus production on the already higher margin products like boneless chicken breasts because of corns surging price. Chicken of course will not be the only food impacted by the surge in corn prices. Similar increases will apply to domestically raised beef and pork which also rely on a mostly corn-based diet.

While weather in the US, Canada and Europe has been the major force driving future prices and predictions it is not the only one. The jump in global oil prices is certain to have some impact on all crops due to the cost of fuel used to plant, tend and harvest along with the cost of petroleum based pesticides, herbicides and fertilizers. The March 11 earthquake in Japan which resulted in disruption to the Japanese auto industry is believed to have had similar impact on the worldwide export of Japanese manufactured farm machinery and spare parts just as growers throughout the Northern Hemisphere were preparing to plant their 2011 warm weather crops.

Just as with oil and gasoline prices, when Americans have to pay more for an essential commodity like food, there are less available monies for discretionary spending. When this happens, unemployment in sectors such as entertainment, fast food, and retail can rise further exacerbating the current slow pace of recovery.

There are some signs that Americans may be aware of the potential crisis in food costs. There is a reported increase in backyard gardening and the stockpiling of canned food items. Whether these actions are motivated by awareness of the commodity markets, the increasing fears of natural disaster or a belief that one of the many recently forecast “doomsday” prophecies may come to pass; the result is many will be able to mitigate to some degree, a sudden spike in prices or reduction in actual food supplies.

It may not seem as attractive as gold or a hedge fund, but that $1,00 you invest right now in 33 ounces of Pork and Beans may, by Thanksgiving dinner, have grown in value to $1.50. A 50% return, regardless of size or nature of the investment is always worth celebrating.