By Louis P. Stanasolovich, CFP^®

We all know food prices have been rising rapidly, but the graph below illustrates information provided by the United Nations proves that food prices have recently exceeded the highs previously attained in late 2007 and early 2008.

Investors may recall, there were food price protesters/rioters in several countries during that time frame. What is triggering these problems again? It is simple; similar to 2007/2008, increasing incomes in the more populous emerging nations are allowing the average citizens to increase their daily caloric intakes from far less than 1,000 calorie diets to north of 1,000 calories. In some countries the caloric intake has increased by approximately 50.0% over the last five years. China and India, the world’s two most populous countries, are generally thought to be two of these countries. China and India together have 2.5 billion citizens or approximately 38.0% of the world’s 6.7 billion total population. Even if China and India’s food consumption did not increase 50.0%, their combined population would still influence world food prices. Some examples of various caloric increases are indicated in the chart below:

As you can see in the chart above, China and India, combined, have had a major impact on the amount of food needed worldwide, irrespective of the actual percentage increase in caloric consumption. These factors, coupled with production problems due to floods (Australia), droughts (Argentina) and fires (Russia stopped exporting grains in 2010 – in effect hoarding grains so as to minimize price increases within Russia) as well as decreases in worldwide inventories despite expansion in the production of many crops has caused prices of many food commodities to skyrocket.

Given that inventories are so low and crop forecasts are average at best, coupled with growing appetites, we expect demand to be greater than supply. Therefore, we expect prices to rise in 2011 by at least high single digits unless we re-enter another worldwide recession. In that scenario, demand may indeed temporarily decline as it did during the second half of 2008 and the first part of 2009. However, at this point in time it does not appear that a recession is on the horizon and especially not in the high growth emerging market countries. As a result, we expect higher prices for food commodities and especially narrow sectors, such as fertilizer companies, looking forward into 2011. We would also not be surprised if price increases continue for at least a few more years, albeit at a slower rate of increase.

Mr. Stanasolovich is the founder, CCO, CEO, and President of Legend Financial Advisors, Inc.^® (Legend) and EmergingWealth Investment Management, Inc. He can be reached at (412) 635-9210 or legend@legend-financial.com.