If you want evidence of the price inflation headwinds the average consumer is facing, look no further than price of food. Against a backdrop of global population growth, and a rising middle class in many emerging regions, the demand for food continues to increase.
And as any economics student that made it through the first week of a 101 course knows, increased demand typically leads to increases in market price. That’s exactly what we’ve seen in agriculture commodities over the past several years.
As the demand for food increases, so does the demand for staple crops like corn, wheat and soybeans. These commodities are the building blocks for a wide range of finished food products. Wheat is used to make cereals and flour. Corn is used in cereals, livestock feed and even biofuel. Soybeans are crushed to produce soybean meal and soybean oil, which then goes toward making a number of products.
So the increasing demand for food works its way down the supply chain, increasing the demand for these crops. And while farm production has increased, allowing for greater supplies of corn, wheat and soybeans, demand is still growing faster than supply. That means increases in price of food.
Just look at the price of corn and soybeans since 2005:
Corn prices are up 33% since the beginning of 2005. That equates to a compound annual growth rate of about 3.6%. That means corn prices rose faster than core inflation in the U.S.
But that’s nothing compared to the price of soybeans, which are up a whopping 263% since 2005. That’s an annual growth rate of 12.9%, or more than six times higher than core inflation, which has averaged about 2%.
These increases in price of food bode well for farmers, who can sell their crops at record-high prices. It also benefits companies that serve the agriculture market – fertilizer producers and farm equipment makers/sellers. Boom & Bust subscribers should be familiar with at least one of these, as our model portfolio bought one such stock back in February of this year. That stock is up 20% as I write.
If you haven’t done so already read the Survive & Prosper issue on “Were you looking to collect Social Security Benefits?”