What the Texas State Fair Taught Me About Inflation

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Created on Tuesday, 12 October 2010 15:17

Written by Jared Levy, Editor, Smart Investing Daily

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I spent my Saturday wandering around the good old Texas State Fair. I walked though the livestock area and stables full of animals of all kinds from all over Texas, and right before exiting I turned to my right to see "Millie" the Brown Swiss cow staring right at me.

My first thought, while staring back into the eyes of this cow, was inflation. Most don't typically associate cows with inflation, I know. But here's what that Brown Swiss cow and inflation have to do with one another...

Inflation Is Knocking

Sara and I have discussed printing U.S. dollars, monetary policy, budget deficits, gold prices, silver prices, precious metals and even crude oil as having direct correlations with impending inflation, but we must not forget about the most important commodity of them all... FOOD!

Without getting into gross detail about the world's eating habits, I wanted to offer some simple examples to help you get a grasp on the importance and consumption of food and, more importantly, the prices of food when inflation comes to roost.

Consumption

According to the USDA, the average American eats about 2,000 calories a day, which breaks down to about 100 grams of protein, 300 grams of carbs, 130 grams of sugar, 15 grams of fiber and about 95 grams of fat.

The U.S. Department of Agriculture estimates that the average person in the United States eats 0.5 lbs of meat, 1.6 lbs of dairy products, 0.2 lbs of fats and oils, 0.8 lbs of fruits, 0.7 lbs of vegetables, 0.5 lbs of grains, and 0.4 lbs of sugars per day for a total of 4.7 lbs of food per day. (Remember there are many non-edible parts of proteins, grains and veggies.)

All told that is over 1,700 pounds of food a year per person (this obviously varies dependent upon age and sex). On average, that can be thought of as 183 pounds of meat/poultry, 584 pounds of milk and its derivatives, 183 pounds of bread, 73 pounds of oils, 146 pounds of sugars, 256 pounds of vegetables and 292 pounds of fruit per year.

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Changing Eating Habits

Americans are certainly unique in the way that we eat, but the world's tastes and consumption are changing as well. If you look at the chart below from the Food and Agriculture Organization of the United Nations, you can see demand increasing and more and more countries consuming proteins (China), which puts demand not only on meat prices, but on grains to feed the livestock.

Global and Regional Per Capita Food Consumption (Kcal Per Capita Per Day)

The Raw Cost of Food

Looking at average prices, based on a four-person household, of several food products for my estimates, most data is taken from USDA, futures prices and retail food websites. I am using a blend of prices, based on an average of different food products in each group. The point of the data here is to show the potential increase in costs for the average family. These figures do NOT include dining out or premium items.

Annual Food Expenditures for a 4-Person Family (Conservative Estimate): $11,974.92
(Remember that we are now in an economic downturn)

I found that about 24% of the average household's income is spent on basic food needs. For most of us, that number is probably higher because many of us dine out and pay premiums for prepared foods. But here's what we really need to think about: When food prices rise, that cuts into our savings and other spending... and we need to protect our savings from getting eaten up by food prices!!

A 10% increase in the cost of food would mean another $1,200 jump in annual costs ($100 per month) on average, per year in this case. Food is not something we will stop spending money on -- IT'S A NECESSITY OF LIFE.

By the way, corn, wheat, sugar and other commodities are all up way over 10% in the past couple months.

Inflation here in the U.S. or even the precursors to it can drive commodity prices higher, and since many commodities are denominated in U.S. dollars, that means a weak dollar = higher commodity prices.

The International Fund for Agriculture Development (IFAD) estimates that:

• The world population is expected to grow by 50% by 2050.
• Food production will need to rise by 50% by 2030 to meet growing demand.
• There are about 500 million small farms in developing countries, supporting almost 2 billion people -- one-third of humanity.
• From 2007 to 2008, the number of undernourished people in the world rose by 40 million to a total of 963 million.
• There is a food crisis out there for many people around the world.

What Can You Do to Protect Yourself?

Food demand is here to stay and with inflation, food costs will be on the rise. Most likely you will see these pricing pressures on the goods that you buy at the market each day.

Of course, one way to hedge against this is to buy precious metals like gold and silver. And you've probably read past issues of Smart Investing Daily in which Sara and I have recommended certain precious metals ETFs and other investments. As long as inflation remains a threat, we'll continue to offer you precious metal plays.

For now, here's another way you can take advantage of rising food prices. You can purchase the Agribusiness ETF (MOO:NYSE), which holds companies such as John Deere (DE:NYSE), Mosaic (MOS:NYSE), Potash Corp (POT:NYSE) and others.

Another way for non-futures traders to invest in agriculture and commodities is the PowerShares Deutsche Bank DB Agriculture Fund (DBA:NYSE). The DBA holds futures contracts in corn, soybeans, wheat, sugar, cocoa, cattle and more.

The world has to eat and as world populations grow and societies like China evolve to eat more proteins, demand will continue to increase. Couple this with our country's printing press stuck in the "on" position, and you have a recipe for continued strength in commodity prices!

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