Food Prices — Biggest Increase In 30 Years: Chris Mayer / May 24, 2007

Well, we’ve been following this story for some time now. The rush for biofuels has ripple effects on food prices. As more and more energy producers look to corn, soybeans, sugar, palm oil and other agricultural products as a source of energy, food producers must compete with them in the marketplace.

So, now we are seeing the visible effects of this competitive bidding for resources. As the Financial Times reports in today’s paper: “Retail food prices are headed for their biggest annual increase in as much as 30 years, raising fears that the world faces an unprecedented period of food price inflation.”

Heavy stuff, eh? In the US, food prices are up 6.7% annualized since the beginning of the year. It’s happening all across the world. Bernstein, a US
research firm, estimates that its Food Commodities index - which tracks the
prices of many agricultural staples - will show a 21% increase this year. That would be the largest increase since the firm created the index a decade ago.

It’s not just agricultural staples. It’s also meats, since raising livestock requires grains as feed. The price of grill-staple beef is up 4.7% from a year ago. Chicken is up 4.6%. Hormel, the big meat maker, says every 10-cent increase in the price of corn costs the firm $3.5 million. Hormel raised prices by about 5% for most of its products already. Smithfield Foods, Tysons and others will surely follow.

In Mayer’s Special Situations, we picked up a small agricultural play in February, which is already up 37%. We also own some of the richest farmland in South America. There are ways to play this boom. — Chris Mayer

• View all of the Crisis & Opportunity Quick Takes >>