Droughts Drive Up Food Prices: Here’s How to Profit…

By Lee Bellinger / November 12, 2013

America’s Water Infrastructure
Breakdown Concealed
by Hot Weather

Droughts are killing the crops
The record-breaking heat wave across the Midwest in 2012 cut America’s food crops and raised prices. All the while grabbing headlines, too.
The situation reminded us of the Soviet “crop failures” that went on for decades before most came to realize that the USSR’s central planners were far more to blame than the weather or other factors!
Even now, water shortages to crops are being written off as the consequence of that super-hot summer. But you as an investor can and should see more!
Mother Nature is exposing America’s rickety water infrastructure system – now failing under the strain of decades of non-investment. Excessive green regulations, overbearing federal policies, rampant lawsuits, and many other government-created disincentives are partly responsible for the failure to invest in long-term projects.
Analysts see pain for consumers in coming months and profit opportunity for savvy investors. A recent report from the National Climatic Data Center states the U.S. is in the middle of the worst drought since 1956.
  • The U.S. Drought Monitor says 80% of the country is in drought or abnormally dry. This is the sixth-highest percentage on record since 1895;
  • T-Storm Weather says July may rank as the third driest and hottest in 118 years.
Large swaths of the Midwest’s crops were already weakened, shrivelled, or dead. Sporadic rains have not been enough. The near-term forecast is more heat in the 90 to 100 degree range with low humidity.

Food Prices Spiked As Predicted

In response to the current drought and mid-term weather outlook, futures markets for soybean, wheat, and corn prices spiked up. Ag experts expect yields much lower than forecasted earlier in the season.
In a Bloomberg report, Advantage Ag Strategies Ltd. president Ron Mortensen said, “The warmer temperatures will increase yield losses for corn and raise the risks for soybeans… Soil moisture is empty, and you can see the crops declining daily. Crops will get smaller without a dramatic increase in rain in the next two weeks.”
On July 16, 2012:
  • Corn futures rose to a 10-month high, jumping 4.4% a bushel;
  • Soybeans rallied to the highest price since July 2008;
  • Soybean-meal futures also climbed to a record;
  • Wheat futures for September delivery recently surged 4.3%.

Farmers Still Losing Money Because
Food Prices Are Still Too Low

Droughts don’t last forever; we may get lucky and catch a break in the weather. Regardless, underlying long-term structural issues continue pushing world food prices steadily higher. One revealing insight: even with higher trading prices, farmers’ profits are razor thin and many are losing money. Food crops are often priced below the cost of production.
Australian agronomist said in a CNBC report, “From growers I know in the U.S., U.K., and particularly Australia and Canada, there is no one making anything out of grain. Beef, dairy, fruit, and vegetables are much the same.”
Hickey, himself ex-farmer, says Australian farmers’ break-even wheat price for 2011 was $180 a ton, but were paid between $130 and $140 a ton. “This food production crisis is coming to a head. Low-priced food cannot continue.”
Agriculture commodities analyst Abah Ofon agrees: “This is largely a result of higher production costs for fertilizer, energy, labor, insurance, and machinery juxtaposed with stiff price competition… This rings true for sugarcane farmers in India, onion farmers in Tasmania, cotton farmers in Benin, or wheat farmers in Kansas.”
And this is before taking into account lower yields from freakish weather. The drought will cut yields, which means fixed costs are spread across smaller volume, cutting into margins and most likely forcing prices higher. Food prices should be priced much higher due to rising inputs and production costs, says Hickey.

More Problems Pushing Food Prices Higher,
Now and in the Near Future

Droughts are killing the crops
They’re not making more land… Affordable and arable land is shrinking. Farmland prices are rising and hitting record prices in many farm states. A Reuters report predicts U.K. farmland will outperform gold, oil, and residential real estate in London. Farming is work most people WON’T do, even if you paid them.
In the U.S., professional agricultural careers aren’t popular like law or finance, and farm labor is hard to find – pushing wages higher. A colleague’s friend, who lives in California’s agricultural heartland, related a story where a group of local growers wanted to help with their area’s high unemployment rate (at the time the region averaged over 12%, his county was over 15%) and recruit the hands they needed for harvest time.
They devised a plan to subsidize higher wages for locals, using all private money (in essence, they were going to overpay new hires during the harvest season out of their own pockets).
They received a lot of media attention for their effort and idea, and they also invested the money to organize and advertise a job fair where they would hire on the spot. According to my source, no one showed up.
We are as troubled as anyone about the negative consequences of illegal immigration, but the fact is that Americans don’t want to pick crops. This is not just a California problem. Visit a major apple orchard in Pennsylvania or a mushroom farm in Connecticut and nearly all crop pickers are immigrants.

There Are Lots of Contributing Factors to Food Inflation

Government meddling and over regulation plays its part in raising ag costs. So do mandates to use food for fuel – turning corn into ethanol while leaving vast stores of U.S. oil and gas reserves in the ground. The world’s population is growing and becoming more affluent, allowing hundreds of millions of more people to afford and demand products that also eat food, which they couldn’t afford before, like beef.
In addition, central bank actions leading to greater currency debasement, or easing, as they like to say, will push prices nominally up through inflation, with or without the help of Mother Nature.
All these bullish factors should be examined, especially if you’re looking to profit from agriculture. Yes, it’s possible to profit from this folly rather than just pay the high prices that result!