Rapidly expanding world population and climatic changes are clearly affecting the price of all foods. Wheat has more than doubled in price in the last 12 months. While much of the increase is attributed to record low yields in Australia over the last two years, we are also seeing a steep rise in demand. Pakistan has placed export restrictions on national wheat stocks due to dwindling supplies and high internal demand. Canada, once the largest exporter of wheat has reduced its crop in the last few years preferring to grow canola. Low wheat prices just two years ago motivated farmers to plant higher profit crops like canola. Compounding the problem is the high cost of crude oil. Traditional food crops such as soybeans, corn and sugar are competing with the energy market as the use of bio fuels increase. In fact the US corn crop, by far the largest commodity produced in the US will not be able to meet demand by ethanol producers within 5 years. There will not be any corn available for feed if the corn-ethanol program attains its projected goal. Planting more is simply not an option. There is a finite amount of land available for growing crops like corn, soybeans and wheat. In fact the competition for crop acreage is now so severe that prices are rising rapidly for cotton, a commodity that is currently not in short supply. It is hoped that by moving prices higher now farmers will avoid converting their cotton fields into corn or soybean fields next year.
Sugar, a commodity that is grown all around the world, has traditionally been priced between 8-12 cents a pound and supplies have been more than adequate for many years. Currently sugar is trading near 15 cents a pound and is set to move above the 20 cent mark within the next few months. It is by far the most efficient agro-product for ethanol production. In fact Brazil is now energy self sufficient because of ethanol production from sugar cane. What was once a cheap commodity is rapidly becoming an important source of energy and we all know the high value our society puts on energy.
As feed costs have increased dramatically this year cattle producers found them selves between a rock and a hard place. Their immediate reaction was to reduce the size of their herds by sending more cattle to slaughter houses. Of course this only served to dampen the price of beef in the short term but by this time next year we can expect meat prices to rise significantly. Demand remains; in fact it is growing rapidly in developing nations like China where incomes are rising. This is happening as cattle stocks are falling. It takes two years for a heifer to mature for slaughter so we can expect demand to far exceed supply soon. Several slaughter houses in the US are shutting down. They are well aware of the small herds and the certainty of slowing business in the meat packing industry.
As consumers we will have no choice but to pay more for the basic foods we need and enjoy. At the same time opportunity exists to profit from the increasing prices. Investors should be allocating more of their portfolio towards commodities. As always it is best to consult with an investment advisor or a commodities specialist before committing funds.
Michael Hayes is an active Futures/FOREX trader. He publishes a weekly trade plan for Futures and FOREX traders. His trading tools for TradeStation users and weekly Trade Plans are available at CTGFutures Learn more about Michael at LinkedIn
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