U.S. Food Prices 2013: How to Profit from the Pain

Rising U.S. food prices in 2013 are about to send U.S. consumers' grocery bills to new highs.

You see, the United States is in its worst drought since the Dust Bowl. Brutal heat waves and barely any rain have crippled farms across the country.

The U.S. Department of Agriculture (USDA) on July 25 issued a report warning every American to expect to pay 3%-4% more for groceries in 2013. That follows a 3.7% food price jump in 2011, and 3.5% expected in 2012.

"The drought is really going to hit food prices next year," Richard Volpe, a USDA economist, told Reuters. He said the pressure on food prices would start to build in 2012.

"It's already affecting corn and soybean prices," Volpe said, "but then it has to work its way all the way through the system into feed prices and then animal prices, then wholesale prices and then finally, retail prices."

Beef prices will be hit the hardest, as they are expected to rise 4%-5%, followed by dairy prices which could climb 3.5% -4.5%. Poultry and egg prices in 2013 are projected to go up 3%-4%, and pork prices 2.5% to 3.5%, the agency said.

But consumers don't have to succumb to the higher prices. You can actually profit from this trend by investing in these rising costs.

Beef Holds the Best Food Price Profits

Since beef and meat prices will be hit the hardest, they offer the biggest investment returns.

Cattle prices have actually gone down this year, but the pullback won't last.

The recent furor over the use of "pink slime" as a filler in ground meat products has suppressed prices, as have concerns that discovery of a single case of "mad cow disease" in April might negatively impact beef exports as it did in 2003. (It hasn't.)

Add in the USDA's recent report that U.S. beef consumption fell for the sixth consecutive year in 2011, and their forecast that consumption will drop to 11.359 million tons in 2012, the lowest level since 1993, and you can see why some traders sold over the past few months.

However, there are many reasons why cattle prices should quickly rebound. Cattle futures could hit a record $1.33 a pound by year-end according to Ron Plain, a livestock economist and advisor to the USDA. Among them:

  • While U.S. beef consumption is easing (because of both cost and trends in health consciousness), export demand for U.S. meat is rising - to an estimated 2.675 billion pounds this year, the highest level ever.
  • The size of the U.S. cattle herd fell to 90.77 million head at the end of 2011, smallest since 1952, as U.S. ranchers culled stock to battle severe drought, skyrocketing feed prices and shrinking margins.
  • The loss of breeding stock as a result of smaller herds means a continued low cattle population, with calf production this year dropping to the lowest levels since 1950.
  • The USDA estimates beef production will drop 2% to 24.671 billion pounds next year, the lowest output since 1993.

Investing in Higher U.S. Food Prices for 2013

When looking for profits on rising meat prices, most investors tend to focus on the livestock futures contracts traded on the CME Group's Agricultural Products division - the leading ones being for live cattle, feeder cattle and lean hogs.

While the outlook for livestock futures is fairly juicy, there are some drawbacks to this investment.

For one thing, you can't trade them through your regular stock broker. You have to have a special futures account and meet minimum net worth and deposit requirements. For another, the costs and risks are fairly high.

Don't worry - if you're more conservative or just leery of the futures markets, you have a couple of other ways to play for potential beef profits.

One way to prepare for higher food prices in 2013 is by investing in the shares of exchange-traded funds (ETFs) or notes (ETNs) focusing on the livestock markets. There are currently nearly a dozen of these, including several on the London Stock Exchange, but the three best - based on liquidity, trading volume and exposure to cattle - are:

iPath Dow Jones UBS Livestock Total Return Sub-Index ETN (NYSEArca: COW), recent price $28.30 - Tracks the Dow Jones UBS Livestock Sub-Index, which has a 63.5% cattle component. The market cap is $51.1 million and daily volume runs around 30,000. You can also trade options on the fund.
E-TRACS UBS Bloomberg CMCI Livestock ETN (NYSEArca: UBC), recent price $19.60 - Smaller, with a market cap of $4.6 million, UBC has a 58.3% cattle component, but typically trades less than 5,000 shares a day.

PowerShares DB Agriculture Fund (NYSEArca: DBA), recent price $30.01 - This is the largest ($2.05 billion market cap) and most active (100,000-plus daily volume) of the agriculture funds, but just 17.0% of assets target cattle. As with COW, DBA has options. However, some caution is needed with this one - because of rising prices for other ag products, DBA has recently moved sharply higher, gaining nearly $5.00 a share over the past six weeks.

A second alternative is to focus on stocks of companies that will be hurt by rising retail beef prices - which, by the way, have not fallen along with cattle futures.

In fact, according to the most recent report from the U.S. Bureau of Labor Statistics, the average price of a pound of hamburger topped $3.01 in June, the highest level since 1984, and extra lean ground beef is over $4.05. Choice cuts of steak are averaging $6.81 a pound, with specialty cuts running $8.00 a pound or more.

This has already sparked concerns among high-volume beef users - McDonald's Corp. (NYSE: MCD), Wendy's Co. (Nasdaq: WEN), and Chipotle Mexican Grill Inc. (NYSE: CMG), to name a few - and prompted major grocery chains like Costco Wholesale Corp. (Nasdaq: COST) to issue shareholder warnings about the potential impact of higher costs and shrinking margins.

Such exposure to rising beef costs as U.S. food prices climb in 2013 could make these stocks potential candidates for short sales - or the purchase of put options if you prefer more limited risk.

Higher U.S. Food Prices: The New Normal

Food price hikes are part of a bigger disturbing pattern that Money Morning's Keith Fitz-Gerald, Dr. Kent Moors and a team of researchers have recently uncovered.

Fitz-Gerald, Moors and colleagues found that the world's astounding population growth is going to cause a substantial drain on the world's environment, energy and economy.

"The United Nations' future population estimates form a near-perfect exponential growth curve. And it shows you that we're well on our way to a tipping point here. More people put a larger drain on our energy needs. They require more food, more money, more everything," said Fitz-Gerald.

The effects population growth will have on the resources we take for granted are frightening.

Luckily, there are ways to prepare. Just check out this team's fascinating research here.

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