The Real Supply Chain Risk: Food

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The Food and Agriculture Organization of the United Nations issues a monthly index that measures the price of food around the globe.

It’s a weighted calculation that analyzes the prices of foods like dairy, meat, sugar, vegetable oil, and cereals.

The verdict for September: The price index hit 130 points.

That’s up 32.8% from the same time last year, and it’s the highest number since 2011, when the index hit 131.9 points.

In the United States, we’re fretting about the state of supply chains due to concerns about the holiday shopping season. We’re worried about toilet paper shortages or a lack of iPhones.

What a luxury.

Around the globe, more and more people are worried about food shortages and food prices.

Today, I want to break down the “breakdown” in food supply chains and what to anticipate in the months and years ahead.

U.S., Global Food Prices Surge

Food prices are at their highest level since 2011, when food riots helped fuel the overthrows of the Egyptian and Libyan governments. If we look at the history of food prices, we see that annualized real and nominal prices face similar increases to what we saw during the massive oil price spike in 1973.

In the U.S., the numbers are quite alarming.

On Wednesday, the U.S. Labor Department released the Consumer Price Index for September. The CPI showed that the U.S. inflation rate increased by 5.4% for the month year-over-year.

Food prices showed an incredible surge for the month. The index for meats, fish, poultry, and eggs increased 10.5% from September 2020. Beef prices jumped 17.6% year-over-year, prompting some experts to speculate that steak may one day become a luxury item like champagne.

From a macroeconomic perspective, it’s impossible to pinpoint just one reason why food prices are on the rise.

Supply chain bottlenecks, a lack of truck drivers, a surge in the global money supply, central banking policies, low interest rates, higher wages, higher gasoline prices, and weather events all combine to create a perfect storm of price pressure.

And each of these factors requires a deeper dive to understand how and why current conditions exist.

Take, for example, the cost of fertilizer.

Remember, food commodities are not the starting point of the global supply chain. Farmers require specific inputs to grow crops and bring them to market, and fertilizer is a massive input cost to farms.

Urea, a popular nitrogen-based fertilizer, is trading at its highest levels since 2012. Likewise, according to Bloomberg data, DAP, a popular phosphate fertilizer, has been trading at its highest levels since 2008.

To better understand the increase in this input cost, one must examine the fertilizer supply chain. High natural gas prices have forced the shutdown of two large fertilizer plants in the United Kingdom.

A recent hurricane knocked out plant production capacity along the Gulf Coast. And shipping delays have impacted the ability to move products around the world. As of Oct. 6, the Port of Los Angeles has a backlog of about 250,000 containers that await entry to the United States. That figure is easily a record, according to Port of Los Angeles Executive Director Gene Seroka.

The result isn’t just higher prices of food at the grocery store. Restaurants are scaling back their menus to account for higher wholesale food prices. You might notice that your local restaurants have cut back on specials (goodbye half-price pizza or 40-cent chicken wing night).

You might pass out if you see a steakhouse menu as well.

What’s the Trade Here?

Get used to the higher food prices. That’s not me suggesting this.

The statement comes from Kraft Heinz CEO Miguel Patricio. During an interview with Fox Business last week, Patricio said that his company would increase prices around the globe. Naturally, a company hyper-focused on margins will do its best to pass on rising costs to consumers.

Investors who are focusing on rising food prices have a few different factors to consider.

First, we must think about the food manufacturers that face higher input costs and pass on those costs to consumers. Companies like Kraft Heinz (KHC) will press to increase prices around the globe. But, in the short term, they may face margin pressures and threats from substitutes. In addition, we want to pay very close attention to restaurant stocks. Fast-food companies that sell cheap food like McDonald’s (MCD) may be more successful at pushing on higher costs to consumers than a company like Ruth’s Hospitality Group (RUTH), the hospitality giant behind Ruth’s Chris Steak House.

Second, traders can look at manufacturers of various inputs like fertilizer and capture potential upside from the continued rise in prices and demand in the future. Typically, the cure for higher commodity prices in the food and agriculture space is higher commodity prices. This means that farmers will plant more commodities like corn and soybeans to take advantage of higher prices. As a result, such production will require more significant inputs like fertilizer in the future. Investors might wish to look at Mosaic (MOS), a stock that recently hit 52-week highs.

Finally, investors can tap into exchange-traded funds around various food commodities. For example, the Invesco DB Agriculture Fund (DBA) is a widely held commodity ETF exposed to corn, soybeans, sugar, coffee, wheat, and lean hogs. Meanwhile, the iPath Bloomberg Livestock Subindex Total Return (COW) offers investors direct exposure to a total return fund investing in two livestock commodities futures contracts (lean hogs and live cattle).

High food prices appear here to stay for the foreseeable future. So don’t spend your holiday season chasing lower prices at the store. Instead, tap into these rising commodity prices and use the profits to offset any sticker shock you might find while searching for your Thanksgiving turkey.

Have you noticed higher prices on your grocery receipts or restaurant bills lately? Are there other global market trends that you’d like me to discuss here? I’d love to hear from you. I can’t respond to every email, but I do read them all.