Rising food prices around the world are complicating efforts by the U.S. Federal Reserve and other global central bankers to keep inflation expectations in check. According to a recent story in Bloomberg , the world is experiencing "the fastest increase in food commodity prices in at least a decade."
Some central banks, including those in Great Britain, Mexico, Chile and South Africa, have already singled out rising food prices as a reason to boost interest rates. In the U.S., the Federal Reserve has kept its benchmark borrowing cost on hold for nearly a year now, but just last week Fed chief Ben Bernanke reiterated to Congress that fighting rising inflation expectations remains his #1 priority.
Of course the U.S. Fed, like many central banks, likes to officially ignore the rising costs of food and energy. These "non-core" items seem to be especially volatile and distort the real trend of underlying inflation - at least so says the Fed. The trouble is, oil price volatility in recent years has been almost totally on the upside, and now it's beginning to look the same way for food.
According to Bloomberg , International Monetary Fund data shows an unprecedented 23% surge in global food prices over just the past 18 months! The price spike in agricultural commodities is due to rising global demand, especially from rapidly industrializing nations in Asia and Eastern Europe.
As a result of these secular shifts in demand, the U.S. Department of Agriculture estimated that global grain inventories have sunk to their lowest levels in 30 years! This is pushing the price of basic agricultural staples like bread, cereal, corn and milk to much higher levels.
However, the thinking inside the hallowed halls of the Fed is that this spike in food prices will not necessarily spill over to the preferred "core rate," which the Fed considers a better measure of underlying price pressure.
Considering what I now pay for a box of Cheerios and a gallon of milk at the store - not to mention the gas needed to lug my groceries home - I'm just not buying the Fed's argument. In fact, General Mills Inc (GIS), the second-largest U.S. cereal maker, just increased prices in June.
And you can bet that if the price of Cheerios and milk are going higher, then prices of Kellogg's (K) Corn Flakes, Hershey's (HSY) chocolate bars, and Kraft (KFT) macaroni & cheese are sure to follow! In fact, even Starbucks (SBUX) recently warned that it may not achieve its profit target this year due to rising milk costs! Better cut back on the cream in your coffee!
Somehow in the end, I think we'll all be paying more very soon for these items.
What this tells me is that we are in the midst of a secular trend in rising commodity prices. As crude oil shoots higher once again, agricultural resource prices are not far behind. In fact, renowned investor and Adventure Capitalist Jim Rogers recently said: "I'm long on nearly all agricultural commodities, about 20 of them, because that's the place to be. It's better than the stock market, the bond market or any other market that I know of right now."
That's some very good advice. Recently, I recommended several specific ways to play rising commodity prices - investments that are simple and easy to trade using a standard brokerage account. No futures, no options, no leverage and no risky bets.
Instead, I favor low-risk, high-probability bets on the long-term secular rise I see playing out in global commodities over the next several years.
MIKE BURNICK, Senior Editor & Global Markets Analyst
P.S. To learn more about how to profit from rising commodity price trends, click here for more information, and access my FREE special report.