How to Play Rising Food Prices

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

How to Play Rising Food Prices

by Steve McDonald, Investment Analyst

Host of The Oxford Club's Market Wake-Up Call

Saturday, January 29, 2011

Editor's Note: In this edition of the Investment U Weekend Update, Steve tackles...

  • Food Inflation - and How to Cash in on it...

  • Demand for Silver Coins Goes Crazy...

  • Coming Soon to a Market Near You... a Rally: The Sectors Primed to Run Higher

  • The"Slap in the Face" Award

Steve has also recorded this update and you can watch the video here.

* * * * * * * * * *

Food inflation in the United States is up around 3% over the past year - 1.5 times the rate of inflation.

What's more, Andrew Wolf of BBT Capital says a 5% jump is not out of the question and could cause real sticker shock in grocery prices. Already, dairy is up 5.5%, while fruit and vegetable prices have risen by 3.5%.

In fact, CNBC did a comparison of costs for five basic foods - meat, dairy, vegetables, bread and consumables - and found that prices have jumped by as much as 22% to 27%, depending on where you live.

If you haven't seen the big moves yet in your local market, it's because for the most part, stores have been absorbing the costs.

What you will notice is that the size of packaged goods will be smaller, while the cost has remained the same. That's a tricky price increase you're not supposed to notice, but still a price increase.

How to Cash in on Food Inflation

Food commodity traders Jim Bower (of Bower Trading) and Shawn Hacket (of Hacket Trading) say there's one food that hasn't seen the big price increases of wheat and corn: Rice.

According to both of them, it will run higher. With current rice production at 30 to 40-year lows, this will add fire to the pricing when demand picks up this year, in order to catch up to the production shortfall.

While commenting that grains were the big winners last year, Bower and Hacket also both say to look for cattle, dairy cattle, butter and milk prices to rise in 2011. Also, high grains prices will make farmland costs for planting sky-high.

But they say food store stocks are not the best way to play this move.

Other ways to profit form this inflation is to use exchange-traded notes (ETNs) and exchange-traded funds (ETFs) that focus on food groups like cattle and hogs, for example. Make sure you research them thoroughly before jumping in.

The Silver Coin Craze

Nicholas Colas, Convergas' Chief Market Strategist, says the demand for silver coins has tripled in the last 18 months. Why?

Because gold is too expensive for the average guy, in addition to concerns about the dollar and the euro, which are driving people to an alternative currency - silver coins. And silver coins are also a good hedge against inflation.

Colas says this is a return the days in the late 1970s when silver ran to around $52 per ounce. Today, we essentially we have a fixed supply of silver, set against an increasing supply of money, which means the foundation is set for a large price run-up.

He likes gold and real estate... if you can afford gold and can wait out the real estate market recovery.

Coming to a Market Near You Soon... a Rally!

Steve East of Height Analytics says we're likely to see a market pullback in the next few months, but it will merely be a temporary glitch in what he calls a big run in 2011.

His prediction for the S&P 500: 1,500 points - over 20% higher.

That forecast is based on corporate profits running at all-time highs, with corporate earnings the only V-shaped recovery in the world.

East says the market is currently at about 80% to 83% of its full value, so there's plenty of room to run. The market multiples have to increase.

East likes energy, industrials and materials, all of which have lagged so far.

The"Slap in the Face" Award

Today's award goes to the folks who created the sales and marketing for cell phones. Their effort is a true modern wonder.

My current cellphone is about six or seven years old. Many of my younger friends laugh at it, but it works and costs me nothing. It's fine for me. It has a camera that I've never used and it's always worked, which is more than I can say for other phones I own.

But they should see the first cellphone I owned - an absolute monster (picture Gordon Gekko's in the movie"Wall Street") and was only six or seven years older than the phone I have now. The advances in technology have been ridiculous, but at the time, it was the cat's meow!

My point is this: I won't buy a so-called smartphone because as soon as I do, it will be outdated and I'll still look foolish to younger folks. I still won't use any more of its amazing applications than I do with this one.

I hate the fact that I'm supposed to be available 24/7 on these things and texting just seems redundant. I'm not that interested in knowing what my friends are doing all the time. I don't care.

But the job that the marketing and sales players have done to convince buyers that they must have the newest and best phones has been one of the best I've ever seen and my hat is off to Verizon (NYSE: VZ), Apple (Nasdaq: AAPL) and AT&T (NYSE: T). They've created a market out of thin air and demand that's beyond comparison.

But I don't want all this phone technology. I find it excessive. It reminds of what my father asked me when I installed an eight-track tape player under the dash of the car I had in college. He said;"Don't you have a radio in that thing?"

I guess nothing ever really changes.

Good investing,

Steve McDonald

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