How to Play Coming Global Food Inflation

Inflation has now hit with a powerful one-two punch combination: food and fuel.

U.S. prices for food and food-related goods have also inched up with no signs of a top yet in sight. The first half of 2007 saw food prices up more than the entire increase for 2006.

Currently, domestic food prices – milk, eggs, meat and produce – continue to rise at the fastest rate in 17 years.

Market response to the upsurge in demand and prices was generally bullish, although cautious in the food-related sector as those equities inched and sometimes lurched upward.

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That’s because a little global inflation may be good for food-related stocks – if increased prices don't squelch consumer spending and profit margins don't shrink.

Last year corn, wheat and soybean prices went through the ceiling on the Chicago Board of Trade. Corn ran up 20 percent. Soybeans rose 80 percent, wheat 90 percent.

These are among the most versatile of grains, used in numerous applications such as feed for livestock, for bread – the so-called staff of life – and the raw material of ethanol, the biofuel that some optimists hope will reduce dependence on fossil fuels.

Some 24 percent of last year's corn crop will be used to produce ethanol, according to reports. Corn prices have doubled over the past 15 months, and they are expected to keep rising.

Harvests of corn, wheat, soybeans and many other edible and otherwise useful commodities were big but demand was bigger, starting in China, and so commodity prices inflated accordingly.

Among the firms that could profit from increased prices, if their revenues and margins don't contract:

• ConAgra Foods of Omaha, a giant marketer of brand name packaged foods

• Archer Daniels Midland, one of the world's largest grain processors

• Staley Continental, a Fortune 500 corn processing and food service firm

• Tyson Foods, world's largest processor and marketer of chicken, beef and pork

• Supermarket chains such as Kroger, Safeway, Piggly Wiggly and others

The firms and sector above have benefited previously from inflationary spikes in commodities and foods.

Worldwide agricultural problems, including droughts and growing populations adding to demand and upward pressure on prices, the inflationary trend is likely to continue for an indeterminate period. It's basic economics at work – scarcity and demand driving the market.

In the event of wars, political unrest and or weather problems, count on even more scarcity of foodstuffs and the inevitable higher prices to follow. Already effected by some or all of the above are India, Yemen and Senegal, recently cited by the Food and Agricultural Organization in Rome as among the hardest-hit nations by rising food prices.

As food-related equities climb, however, investors should watch this market and specific stocks in particular for signs of problems which could impact future earnings.

Look for reported insider selling, quarterly earnings reports which may show increased revenues but lower nets, and of course, a decline in gross revenues.

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