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Food inflation

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Food Prices: Here's the Real Story

The United Nations on Thursday reported food prices eased in April after steadily rising in 2012's first quarter. However, global soybean price increases remained a top concern at the U.N. Food and Agriculture Organization (FAO). In a conversation with Reuters, FAO economist and grain analyst Abdolreza Abbassian explained: "We expect global food prices to remain under downward pressure this year unless there are any unexpected shocks to the supply side, such as unfavorable weather. For such reasons, it is very hard to predict for sure in what direction prices will move. The only real area that could trigger food price increases would be soybeans which we see in tight supply, then pushing up corn prices as a result." But Abbassian understates the most important issue in the food markets. You see, Abbassian implies that food prices remain "somewhat" susceptible to outside volatility in the currency and energy markets. In fact, this view is focusing on the short-term. It's ignoring the sector's most pressing long-term concerns To continue reading, please click here...

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Sector Watch: Five Stocks To Help You Fight Food Inflation Pain

Unless you've stocked up on enough food to hold you through next year, you won't be able to avoid the effects of food inflation.

According to the U.S. consumer price index, overall food prices rose 4.7% in September from the year before. That's more than the 4.6% increase in August and 4.2% jump in July.

And the price pain will continue.

Global food prices are expected to increase 4% next year, and could climb even higher on supply squeezes. Droughts and floods have disrupted global crop yields, meaning higher prices at both grocery stores and restaurants.

Food at home prices rose 6.2% in September from the previous year. Grocery stores were eating most of the price increases earlier in the year, somewhat insulating U.S. consumers, but recently that's begun to change.

"The era of grocers holding the line on retail-food cost increases is basically over," John Anderson, a senior economist at the Farm Bureau in Washington, told Bloomberg News.

Food away from home didn't rise as high as food at home, up a more modest 2.6%. That's the widest gap between the two price measures since 1990.

The faster rise in grocery store prices has led some restaurants to start boosting prices to catch up. They think consumers are less likely to be deterred by increases now that food at home costs more, too.
MM Sector Watch
"If people go to the supermarket and see that the core items they're purchasing are on the rise, then they are less likely to be surprised if restaurants are raising prices as well," Jeffrey Bernstein, an analyst with Barclays Capital, told Bloomberg.

Many chains have tried to avoid changes, but the third-quarter's 8% surge in commodity prices has pushed some to their breaking point. Now popular eateries like McDonald's Corp. (NYSE: MCD) and Panera Bread Co. (Nasdaq: PNRA), which have already adjusted their menu prices this year, are considering more price hikes.

Since food companies and restaurants are charging more for their products, brands that are consumers' favorites are raking in profits. Higher prices have boosted the Consumer Staples Select Sect. SPDR exchange-traded fund (NYSEARCA: XLP) about 15% in the past two years, while the Standard & Poor's Supercomposite Restaurants Index has soared 64%.

This means now's the time for you to offset your bloated food budgets by hunting for the sector's most successful stocks.

Five Food Inflation Investments

Here are five food-related stocks positioned to grow along with food prices:

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Crop-Killing Drought to Push Food Inflation Even Higher

A drought affecting one-third of the lower 48 states has hurt several key food crops, driving up prices this year and assuring widespread food inflation well into 2012.

According to the National Climatic Data Center, the drought has caused more than $10 billion in losses to agriculture and cattle, a number it expects to keep rising as the drought continues.

Meteorologists blame the drought on a La Niña weather pattern expected to last at least through the winter.

Crops most affected include corn and peanuts. In addition, the lack of rain dried cattle grazing pastures to dust, which has translated to higher beef prices.

"Yes, we are going to see higher prices this Thanksgiving," Purdue University agricultural economist Corinne Alexander told The Atlantic.

The American Farm Bureau estimates that a Thanksgiving meal for 10 will cost 13% more this year than it did last year.

The U.S. economy already has inflationary pressure as a result of the stimulative policies of the U.S. Federal Reserve pumping it with hundreds of billions of dollars.

"Ultra-low interest rates and excess money supply growth are what's been driving inflation," said Money Morning Global Investing Strategist Martin Hutchinson. "They raise commodity prices, which over time feeds into inflation in general."

Now the drought is pushing food inflation higher than overall inflation.

The Consumer Price Index (CPI) in September was up 3.9% over the previous year, while the increase for food alone was up 4.7%. Over the past five years, world food costs have risen 68%.

Earlier in the year, grocery stores were eating most of the price increases, somewhat insulating U.S. consumers. But in recent months that's begun to change.

"The era of grocers holding the line on retail-food cost increases is basically over," John Anderson, a senior economist at the Farm Bureau in Washington, told Bloomberg News.

The Biggest Bites

Prices are going up the most dramatically in the categories of food most affected by the drought. Beef is up 10.1%, for instance.

With pastures drying up over the summer, many ranchers were forced to sell off cattle before they could reproduce. While that briefly increased the supply of beef, the current shortage of cattle - the U.S. herd was at a 38-year low this summer - is impacting prices.

The drought has caused the price of hay to skyrocket from $80 a ton to $200 a ton, which, because it's used as forage for farm animals, has contributed to a 10.2% spike in dairy prices.

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