How is the bowl of Wheaties you ate this morning linked to a barrel of oil? In this exclusive interview with The Energy Report, Bob Moriarty, founder of 321energy.com, explains why the cost of producing food is directly correlated to fuel and picks which companies are poised to benefit from the rising value of potash.

The Energy Report: You wrote that “the uprising in Egypt began as a protest against the rapidly rising cost of food and energy.” You went on to say that “it seems obvious that food and fuel are the same thing under a different cloak. Energy is food is population.” Can you elaborate?

Bob Moriarty: Anyone who wants to verify this should search Google for a chart of population growth compared to oil production. The two are identical from about 1850 on. Here’s why: it takes so many calories of fuel to produce so many calories of food. It’s direct, linear and absolute. If the price of fuel doubles tomorrow, how much more or less driving would you do?

TER: Less, but I would still have to drive. I could not eliminate it.

BM: Would you eat more food or less food?

TER: I could eat less given the price.

BM: Everyone else in the world feels the same way. The majority of people in the world survive on $2 worth of food each day. But how do you eat less when you are on the edge of starvation in the beginning? There has been a 70% increase in the price of wheat since June. That’s catastrophic.

I believe that peak oil, or the peak of oil production, occurred back in 2005 or 2006. Peak oil means peak food, which means peak population. We’re going to consume less fuel per capita 20 years from now because there’s simply no alternative. In turn, that means the population is going to decrease. It could decrease through starvation, disease, war or all three.

TER: In the same article, you said there are other ways that people might be able to produce more food with the same amount of fuel. Besides decreases in population, another outcome could be that less oil would drive more innovation in food production.

BM: That’s the real point of the article—there are things that people can do. Potash is used to make fertilizer. As food gets more valuable, potash gets more valuable. It’s not necessarily that you’re more efficient in the production of food. If the price of wheat doubles, farmers can afford twice as much potash. It’s not necessarily more efficient; it’s just cheaper in relative terms.

TER: Besides wheat, other food commodities have recently increased dramatically in price. Potash has already risen quite a bit in cost. Looking forward, is there still a lot of upside for potash as a fertilizer component?

BM: Absolutely, because the price of food is going to go higher and higher. Potash is around $600/ton now, but it could be $1,500/ton based on the cost of food today.

TER: If the price of potash increases, do you anticipate that more juniors and explorers will be exploring for potash?

BM: That’s the way supply and demand is supposed to work. When uranium went from $8/lb. to $136/lb., there were 450 companies out there exploring for it. Now that doesn’t mean they’ll be successful.

TER: You were a very early investor in Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF). But, ironically, you sold your Amazon Mining (TSX.V:AMZ) shares after the company abandoned gold-mining plans for potash.

BM: Amazon had a gold project in the Amazon. I was hoping the company would get into production. Shares at the time were around $0.09. The company made the decision to go into potash. Potash was not particularly popular then, and I thought they were making a mistake. I wanted to see them advance the gold project and get it into production. So, I sold all my shares. Well, everybody in the universe discovered potash at the same time. Amazon Potash is an $8 stock now. I should’ve hung on to the stock. That was a very expensive mistake on my part.

TER: What about Passport changed your mind about potash?

BM: Someone presented the Passport story to me about two-and-a-half years ago. It had a big land position in Holbrook Basin, Arizona. I bought into it. Potash was about $900/ton back then. The stock went up to around $0.22.

The company came to a point at which it had squandered all its money. Fortunately, the company found a deep-pockets investor. The investor thought that it sounded like a pretty easy deal, and asked what the company needed to succeed. They said, “We need a check for $750,000 right now so we can go drill.” They did drill and it was successful. The investor was buying shares at a nickel each. The stock was around $1 two weeks ago. He made a ton of money in it.

For Rest of Interview Go Here

Frailty of monetary policy under delusional Keynesians is evident whenever we think about Agri-Food. Price increases for Agri-Foods may be causing measures of consumer prices to rise in many countries. That “inflation,” which it is not, is causing some discomfort for politicians around the world. The textbook response, per the ineffective and inbred Keynesian economists, is to tighten monetary policy, perhaps raising interest rates. We ask one simple question: How does raising interest rates cause the supply of Agri-Food to rise, forcing prices lower? Will higher interest rates keep the price of shoes from rising?

“Prices for cattle hides are on the rise as leather demand rebounds and global supplies fall, boosting the returns of meat packers and cattle producers.”

“Federal[U.S.] data show hide prices are at their highest level in nearly a decade, jumping 24% in the last year to $82 apiece. Further gains are likely this year as U.S. supplies begin to shrink and consumer demand for leather continues to recover, . .”

“Helping to fuel the jump in prices has been a growing middle class in China, Vietnam and other Asian countries where consumers are increasingly buying leather goods as incomes rise. As economies around the world recover from deep recessions, consumers are again shelling out for luxury leather goods.”

“U.S. Commerce Department put the value of cattle hide exports in 2010 at $1.373 billion, up 67.7% from a year earlier when low prices allowed the number of actual hides exported to hit a record 35.6 million pieces.(Commodity News for Tomorrow, 4 March 2011)”

If clothing retailers think cotton prices are a drag, wait till they see what happens in the shoe department. Price of hides and shoes cannot rise sufficiently to induce cattle breeders to expand herds. Such is the Joy of Agri-Food Price Inelasticity. No matter how high the price of shoes might rise, ranchers will not raise more cattle to satisfy demand for leather.

How will QE-2, QE-3,or QE-4, in a chain of futile an

d doomed policies, or raising interest rates hold down price of chickens? In the above graph is portrayed the price of broilers, table chicken, in the U.S. As is readily evident, even to a Keynesian economist, chicken prices have broke out to upside.

Prices for chicken had long been flat, held down by the brutal, price suppressing  power of a group of oligopolistic chicken purchasing companies. All that worked, till grain prices rose dramatically. Profits of chicken raisers disappeared faster than the grain fed to the chickens. Producers had no choice but to unload those chickens into the market. Prices collapsed under that selling. First round effect of higher grain prices is lower meat prices as producers sell animals to avoid feeding them.

Now, it appears, the second round effect has developed. With smaller flocks the buyers have lost some power, and prices have risen dramatically. Could $1.25 per pound chicken arrive in the near future? Quite possibly, and one better enjoy that cheap chicken sandwich at your favorite restaurant while one can.

Investors that missed the latest, but surely not the last, round of excitement in Agri-Equities may get another opportunity this Summer. Agri-Food prices, on average, have dipped to their lowest level in five weeks. That correction is likely to continue well into the North American growing season.

Traders and buyers had simply become too bearish on supply, bullish on prices, in the short-term.  Buying of wheat and corn may have been panic driven, and in excess of true needs. Latest USDA WASDE, World Agriculture Supply Demand Estimate, simply did not have enough bear food in it for the supply bears. Next important report is the U.S. planting intentions report due 31 March. It will probably also fail to nourish the supply bears. Add a little of Japan’s misery, and we have likelihood of a continuing correction in Agri-Food prices.

Tier One Agri-Equities, large multinational Agri-Food companies, have risen in conjunction with the rally in Agri-Food prices. Likely that they will correct along with Agri-Food prices, as they did after the 2008 run. Tier Two Agri-Equities, Chinese Agri-Equities, then performed the best. As they are over sold relative to Tier One Agri-Equities, investors should be preparing to add to Chinese Agri-Equities in the near future.

Soaring food prices have been, perhaps, the most pressing global issue of the past two years – yet the U.S. Federal Reserve has taken a “hear no evil, see no evil, speak no evil” approach to the global crisis.

Instead, the Fed has dutifully maintained its focus on so called “core inflation” in the United States – even as Americans suffer the consequences of the “hidden inflation” the government refuses to account for.

The Federal Reserve excludes food and fuel prices from its preferred gauge of inflation because they are often influenced by erratic weather patterns and political turmoil. That at times has been the case over the past few years.

Droughts in Russia and floods in Australia, for instance have helped drive food prices to record highs. However, the Fed’s monetary policy has also affected prices. The U.S. dollar has fallen substantially in the past three years, and the prices of agricultural commodities – which are priced in dollars – have reflected that decline. The result has been a chilling effect on consumers in local grocery stores and gas stations.

An 8.5% monthly gain in gasoline prices pushed the transportation costs up 2.3% in December, making it the driving force behind the consumer price index’s 0.5% headline gain. Core inflation, which excludes food and energy prices, rose just 0.1%.

Oil prices rose 10.2% in the period from Nov. 1 to Dec. 31, as rising demand in emerging markets and a subservient greenback pushed the price of crude over $90 a barrel for the first time in two years.

U.S. food prices rose 0.1% in December following a 0.2% increase the month prior. Prices were up 1.5% for all of 2010, with meat and dairy products making the biggest jumps. Beef prices were up 6.1% in December 2010 compared with a year earlier, while pork prices jumped 11.2% last month compared with December 2009.

And food prices are poised to climb substantially higher in 2011, spiking 2% to 3%, according to the U.S. Department of Agriculture’s Economic Research Service. That price jump will impact prices at grocery stores and restaurants.

For instance, a food basket survey by The Tennessean earlier this month found a 12.5% increase in prices for a typical grocery basket full of staples compared to November 2009. And McDonald’s Corp. (NYSE: MCD) – the world’s largest food chain – said yesterday (Tuesday) that it plans to raise prices this year to help offset an expected rise in its grocery bill for the 10 commodities that account for around 75% of its food preparation costs.

“As commodity and other cost pressures become more pronounced as we move throughout the year, we will likely increase prices to offset some but not necessarily all of these increases,” said McDonald’s Chief Financial Officer Peter Bensen.

The average price McDonald’s pays for its most used ingredients – beef, chicken, cheese, and wheat – is expected to go up by 2-2.5% this year.

The restaurateur’s major rival Yum! Brands Inc. (NYSE: YUM) and packaged food companies like Kraft Foods Inc. (NYSE: KFT) and Sara Lee Corp. (NYSE: SLE) are likely to see similar price increases.

Still, U.S. Federal Reserve Chairman Ben S. Bernanke insists that price pressures in the United States remain subdued.

“Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward,” the FOMC said in a statement following its Dec. 14 meeting.

The FOMC today (Wednesday) will conclude its first two-day meeting of 2011, and likely announce no significant changes to its monetary policy.

“While the Fed may identify higher commodity prices as a potential concern, policymakers are not likely to reverse course and tighten policy unless higher commodity prices push through to core inflation,” said University of Oregon economics professor Tim Duy. “Such an outcome appears unlikely given persistently high unemployment.”

In the meantime, the United States isn’t the only country suffering from higher food costs. In fact, pressures here are tame compared to the rest of the world.

A Global Epidemic

World food prices hit a record high in December, jumping above the 2008 food crisis levels and developing into an “alarming” situation, according to a report released earlier this month by the United Nations’ Food and Agriculture Organization (FAO).

The FAO’s Food Price Index, which tracks the prices of 55 food commodities, climbed for the sixth consecutive month to hit 214.7 points in December, its highest reading since the measure was first calculated in 1990. This beat the previous June 2008 record of 213.5 and is a 25% increase from December 2009.

Soaring prices for sugar, corn, grain, meat and oilseeds pushed the index to its new peak. Sugar recently hit a 30-year high, U.S. corn prices surged 52% last year, European wheat prices doubled and U.S. soybean prices rose 30%.

Unfavorable environmental conditions, such as floods in Australia, contributed to the surge in prices. But observers have pointed out the prices were rising long before these events culminated in what’s fast becoming a global crisis.

In parts of Australia, retail fruit prices jumped 17% between the September and December quarters last year and vegetable prices rose 15%.

Surging food prices in 2008 led to riots in more than 30 countries and this year have already touched off protests in Tunisia and Algeria.

European Central Bank President Jean-Claude Trichet earlier this week urged central bankers everywhere to ensure that higher food prices don’t get a foothold in the global economy. Indeed, Trichet emphasized overall inflation, rather than the core measures favored by the U.S. central bank.

“In the U.S., the Fed considers that core inflation is a good predictor for future headline inflation,” he said in an interview with the Wall Street Journal. But elsewhere around the world, “core inflation is not necessarily a good predictor.”

A Bountiful Harvest for Agricultural Stocks

While rising food prices are a burden for most Americans, they’re a boon for the U.S. agricultural industry.

U.S. farm income last year probably exceeded the 2004 record of $87.3 billion, and cropland values gained as much as 10%, Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic, told the Pittsburgh Post-Gazette.

Higher prices will push U.S. agricultural exports up 16% to a record $126.5 billion this year, according to the Department of Agriculture.

The Department of Agriculture anticipates corn inventories will decline 5.5% this year to the lowest level in 15 years. Corn prices rose nearly 75% last year, catapulting shares of agribusiness companies and exchange-traded funds (ETFs).

The Teucrium Corn Fund (NYSE: CORN), which tracks the price fluctuations of corn, is up about 60% in the past year. And the Market Vectors Agribusiness ETF (NYSE: MOO), which offers broader exposure to the agricultural sector, is up 26%.

Companies that produce genetically engineered seeds that increase crop yields – like Monsanto Co. (NYSE: MON) and E.I. du Pont de Nemours & Co. (NYSE: DD) – also stand to gain.

Deere & Co. (NYSE: DE), the world’s largest farm equipment manufacturer, has seen its shares surge more than 66% in the past year on higher commodities prices.

But if you really want to profit from the agricultural boom, you should pick up the Money Map Report’s “2011 Investor’s Forecast,” which has already been delivered to subscribers. In it you’ll find an industrial-equipment maker that’s becoming the global leader of the worldwide agricultural boom and getting ready to blow past even Deere. If you’re not a Money Map subscriber you can sign up to receive the report by clicking here.

News and Related Story Links:

• Bureau of Labor Statistics:

  Consumer Price Index Summary

• Money Morning:

  Energy Forecast: Oil Prices Poised to Again Test Record Levels in 2011

• The Tennessean:

  Consumers hit with higher food prices

• Money Morning:

  Record High World Food Prices Spark Fears of Looming Global Crisis

• Money Morning:

  United Nations Warns of Food Price Hikes, Painting a Picture Similar to 2008′s “Silent Tsunami”

• Wall Street Journal:

  Global Price Fears Mount

• Pittsburgh Post-Gazette:

  Record food prices cause riots, stoke U.S. farm economy

• Money Morning:

  Cocoa Prices Skyrocket As Ivory Coast Election Dispute Spawns Export Ban

• Money Morning:

  China Monetary Policy: Inflation Won’t Last – Growth Will

• Money Morning:

  Core Inflation Numbers Will Allow the Fed to Stay the Course – For Now

• Money Morning:

  Surging Corn Prices Making Hay for Commodities Producers

• Money Morning:

  The Only Investment “Forecast” You’ll Need for 2011

As the green line in the above chart portrays, the Agri-Food Price Index has more than doubled in the past four years. How many industries around the world have experienced the selling price of their product move higher that dramatically? Over the same period of time we also note, using the red line, that the price of $Gold has not kept up with the price of Agri-Food.

One of the big lessons of this past year has been that Agri-Foods are not produced in a factory. They are also produced, with rare exception, one time of the year. They are grown in dirt, not the nearest social network site. In 2010, Russia barred the exportation of wheat. Wheat in Russia, as is the case in most countries, is harvested only one time a year. Worlds will not know till near the middle of this year if any Russian wheat will be exported. A complacent world expected Australia to help fill the  gap, only to have that game rained out.

China has indeed been a massive miracle of industrial production over the past decade. That nation has demonstrated an uncanny ability to build a plethora of goods at wonderfully low prices. From televisions to solar panels, China can produce vast surplus of many things. That is, with the exception of Agri-Food.

With Agri-Food, it must increasingly import them. In 2010 that China was a net importer of corn became painfully apparent as the price of corn moved dramatically higher. It had actually achieved that status the year before by importing distillers dry grain. Was part of President Hu’s visit to the  U.S. in part to discover the minimum bid for Iowa?

Many have benefitted from the inadequate supplies of Agri-Food, and in particular the higher prices. In above chart, the green line portrays what Agri-Equities have been doing over the past several years. Solid brown line is for $Gold. While both have arrived at about the same spot on the graph, they took different paths.

A naive review of that graph might also conclude that Agri-Equities and $Gold have moved together.  On the contrary, they have not moved in close conjunction with each other. Coefficient of determination (R2) is only 4%. That means that combining Agri-Equities with $Gold in a portfolio would have produced the about same return as either, but would have done so with far less total investment risk. Not owning Agri-Equities is a risky investment position, especially in a world with an increasingly inadequate Agri-Food supply.

Our 4th Agri-Food Commodities: An Investment Alternative, January 2011 was recently released to considerable interest. This analysis, though statistical, dry, and boring, has rapidly become the standard for reporting and analyzing returns produced by Agri-Food commodity prices. It thoroughly documents the superiority of returns produced by Agri-Food commodity prices, which ultimately drive the returns on Agri-Investments. This report can be previewed at our web site or at www.scribd.com

By Chris Mayer

01/24/11 Gaithersburg, Maryland – A story I’ve been warning about for years is making sensational headlines right now.

It’s a story most people don’t realize could make a huge impact on all of our portfolios in a number of ways.

“US Crop Stock Forecasts Deepen Fears of Food Crisis” read a recent Financial Times headline. The US government cut its estimate for key crops. This came only a week after the UN warned the world faces “food price shock.” Corn and soybean prices jumped and now sit at 30-month highs. Inventories are very tight. Corn is up 94% since June!

And the world worries about a repeat of 2008, when food riots erupted in poor countries around the world.

This has been in the works for a long time. It was there for all to see. The ratio of arable land to people has been falling for decades. Gains in crop yields have slowed. Population has expanded and income levels have grown. Diets have shifted. More people are eating more meat, which is much more grain-intensive to produce.

And the love affair with biofuels puts food production in direct competition with energy. Plus, there are water scarcity issues affecting food supply. My readers have made tremendous gains from this trend by owning shares of agricultural fertilizer producers Potash (POT) and Mosaic (MOS).

I should also make the point that this fits in with another topic I’m concerned about: inflation. Now, the man on the street uses the term “inflation” to mean when prices for everything seem to go up. Or put another way, inflation is when the dollars in his pocket buy less. In truth, this is the effect of inflation. The root cause is simply money printing. When you print more money, that money has less value than if you didn’t print any new money at all.

So what we are seeing with rising commodity prices is not only the supply and demand story I led off with. It’s also the effect of paper money losing its purchasing power in the real world of things. This, too, was easy enough to see. Finally, all that money printing – the “quantitative easing” baloney you’ve heard about – is coming home to roost.

Still, it’s disconcerting to see it all playing out. For the sake of our world, I’d rather have gotten this one wrong. But we have to deal with the market we are in. So what might “Food Crisis II” mean from an investment point of view?

Food prices will have to rise: There is no way around this. We are all going to pay more for food. Wells Fargo predicts US retail food prices will rise about 4% this year. Some things will go up much more. Pork and beef could rise more than 10%.

This won’t necessarily mean that meat producer stocks are good buys, because they may not get to raise prices to fully offset the rise in feed costs. Anecdotally, for instance, The Wall Street Journal cited a Minnesota 300-cow operation that reported feed costs had doubled. Plus, I’ve listened in to the conference calls of a number of food producers – Tyson, Hormel, and Sanderson Farms. They all talk about getting squeezed by rising feed costs.

I do think these companies will be good buys sometime this year, because people will adapt and farmers will respond. Producers won’t produce meat at a loss for long. And farmers will bring every resource they have to bear. It’s been slow getting the crops in the ground so far in many places. But ultimately, there is a lot of potential supply from Brazil and the US.

Still, weather is the big wild card here. If we have a drought in the US or in Brazil, this could really get ugly.

Emerging markets are vulnerable: This follows from the above. It doesn’t really faze the typical American to have to pay 4% more at the grocery store. Food is still such a small part of the typical American’s budget. I think Michael Pollan in The Omnivore’s Dilemma points out that the US spends 9% of its income on food, which is among the lowest percentage of any people anywhere at any time in history.

The same is not true in India or China or many emerging markets. In China, people spend 50% of every incremental dollar on food. And in India, it’s more like 70%. So the rising price of food is felt more keenly in these markets.

The price of food is rising faster in emerging markets, too. In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone. All around the world, emerging markets have a big problem with rising food prices. Indonesia’s president is trying to get people to grow their own chili peppers. And the South Korean government recently released emergency stores of cabbage, pork, mackerel, radish, and other staples. I could go on and on.

The point is that the emerging markets boom is not going to go far when it faces a food crisis. Already, the markets are starting to reflect this. India’s Sensex was down three straight days and off 6% to start the year. Other markets also started badly. And if China and India and the rest slow down, it’s going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.

I’m keeping a close eye on these developments. There will be opportunities in this crisis, as with all others. For instance, though rising grain prices are not good for meat producers or emerging markets right now, it’s a boon for fertilizer stocks. As the old golf saying goes, “Every putt makes somebody happy.”

Regards,

Chris Mayer
for The Daily Reckoning

Read more: Food Crisis II http://dailyreckoning.com/food-crisis-ii/#ixzz1C5gcBTtG

By Addison Wiggin

01/18/11 Baltimore, Maryland – This morning, we see Britain’s consumer price index grew in December to an annualized 3.7%. Fuel prices are growing at their fastest pace since July, and food prices are zooming at a rate last seen in May 2009.

Like the US Federal Reserve, the Bank of England has an inflation “sweet spot” of 2%. But Britain’s CPI has been above 3% for 13 months now. Unlike in the United States, even the “core” rate of inflation in the UK is rising at an alarming 2.9%.

“If history is any guide,” Chris Mayer contends, “inflation will likely get much worse. Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980.

“In other countries, it was worse. In the UK, inflation topped out at 27%; in Japan, 30%.

“The year 2011 is the year when inflation will play the role of wrecking ball,” Chris declares.

“Emerging markets have been a vital part of the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them.

“In India, food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.

“In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it’s the surging price of coal that may prove to be China’s Achilles’ heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.

“The basics like food and energy are like brakes on these economies.”

But that’s not all they will put the brakes on… Here’s an old video of Jim Rogers, Vancouver keynote, saying that given the current reckless spending and printing strategy in Washington, we’ll eventually experience “an inflationary holocaust.” In 4:33 or so is the mark that he gets into the holocaust theme.

Here’s another one from our friend Ron Paul laying into Ben Bernanke a while back. In the 3:43 mark he “goes off” on the Fed chairman explaining how money printing is already hurting retirees.

And for good measure, here’s video of another Vancouver veteran, Nassim Taleb, saying he feels more jittery about a currency crisis now than he did when he left his native Lebanon during a meltdown.

Fact is, once it gets started, inflation is hard to stop. Not that Wall Street bankers or your friendly Washington representatives give a hoot. They’re not the ones who get walloped when money stops buying necessities…and interest rates spiral upward out of control.

Addison Wiggin
for The Daily Reckoning

Read more: When Rising Food and Energy Prices Begin to Wreak Havoc http://dailyreckoning.com/when-rising-food-and-energy-prices-begin-to-wreak-havoc/#ixzz1BRI7p000

While onion prices are not included in our Agri-Food Price Index, they were not necessary to move the index to a new high. Around the world rising global demand along with constrained supply slammed into the weather, most of which was bad. From drought in Russia to flooding in Australia, that which could go wrong has gone wrong. If the world had adequate reserves of Agri-Food such developments would not matter, but it does not.

Regrettably, the world does not have bountiful Agri-Food reserves. U.S. Department of Agriculture(USDA) forecasts that in this coming year the world will have only 41 days of corn in reserves. Rice reserves will be only 61 days. Wheat is a guess as no one knows yet how much will come out of Russia, if any, or the U.S. As an indication of the wheat situation, U.S. export sales, made but not completed, are up more than 100% from a year ago.

Onions, sugar, and cotton, about which we talked last time, are important indicators of the global Agri-Food situation. Why? Some of them are not absolutely necessary, onions and sugar, or necessary in overly bountiful quantity, cotton. Most of us could live with a few less T-shirts per year. Their production, though, must compete with real foods, those necessary to sustain people. In the world of tomorrow, onions, sugar, and cotton must compete with corn and soybeans for productive acreage. Sugar at one time was a food only available to the aristocracy, and that may happen again.

Other signs of stress are apparent in the global Agri-Food system. Palm oil price is portrayed in the chart below. Palm oil is the most consumed vegetable oil in the world. China and India are both the largest consumers and importers of vegetable oils. With domestic consumption of edible oils in those two nations exceeding production, growing demand on global edible oil supplies is likely to continue. As is apparent in the chart, palm oil prices have moved dramatically higher.

Vegetable oils are essential to the cooking process. Every meal we eat either includes vegetable oil or another Agri-Food that must compete for the supply of oil seed grains. Edible oils are derived from oil palm fruit and the crushing of soybeans, corn, canola, sesame, etc. Cooking in vegetable oils rather than animal fats may not appease the food gestapo, but it may become necessary. Necessary does not, however, mean cheaper.

The extraordinary weather related price gains will likely fade sometime this year. Weather is a classic case of a system that tends to regress to the mean. Bad weather becomes normal, and good weather gets worse.

Those strong Agri-Food price gains of 2010 supported dramatic price action in many of the Agri-Equities. Should weather become more normal, those equity prices might be forced to normalize. Between now and then, investors have an opportunity to research those Agri-Equities. If one’s portfolio was void of Agri-Equities in 2010, that is, as they say, water under the bridge. One would not want to make the same mistake when looking back from 2012.

Finally, we have no further information on rumor that the Lexus might become the state bird of Iowa.

Our 4^th Agri-Food Commodities: An Investment Alternative, January 2011 has recently been released. This analysis, though statistical, dry, and boring, is rapidly becoming the standard for reporting the returns produced by Agri-Food commodity prices. It thoroughly documents the superiority of returns produced by Agri-Food commodity prices, which ultimately drive the returns on Agri-Investments. This report can be previewed at our web site or at www.scribd.com

The Food and Agriculture Organization of the United Nations has some nice charts to help us visualize the scary resurgence of inflation in food prices:

If you’ve been in a market lately, you already know sugar (NYSE:SGG), oil & fats, and cereals have surged the most.

The FAO notes we’re seeing historically high prices again:

By mid-2008, international food prices had skyrocketed to their highest level in 30 years … Though food prices have fallen from those 2008 peaks, they are higher than they were before the onset of the food price crisis and will likely remain volatile.

Unfortunately, a strengthening global economy coupled with a monetization of the US debt spells danger for where prices may head in 2011.

Profit from the News: Find out which stocks stand to benefit most in Your Cheat Sheet to Investing in Agriculture >>

Those higher prices of the latter half of 2010 will be incorporated into the cost of clothing in 2011. World is being forced to pay more for cotton to entice farmers to grow cotton rather than food. Farmers can only grow one Agri-Food crop at a time in those fields, generally one time a year. Farm fields are not factories. If you want cotton, be prepared to give up some cornflakes. It is either cotton or “corn.” And forget all that nonsense about ethanol raising the price of Agri-Food to the world. Every time someone buys a T-shirt, the price of Agri-Food will rise.

Oh, and forget shifting to wool. According to the USDA, price of wool is up about 50% from a year ago. That is going to make those sweaters needed to survive Global Cooling a lot more expensive. But, that has other ramifications. If the world wants wool, it will need to allow lambs to become wool bearing adults. So, enjoy that rack of lamb this holiday, you may not be able to afford it next year cause you bought a sweater.

As the next chart portrays, cotton was the winner this past year. A bale of cotton outperformed Gold by a factor of about 4 and the stock market by a factor of more than 5. In fact, 9 of 15 Agri-Food commodities in that chart performed better than Gold. That development should come as no surprise. Every person around the world must buy Agri-Foods. No one by necessity needs Gold.

Extraordinary gains achieved by Agri-Food commodities in 2010 are not likely to be repeated in the coming year. Tractor stocks will not likely rise by 60-100% again in 2011, as they did this past year. However, with the global Agri-Food system moving to a short supply situation in the long-term, price gains will need to be above those experienced by other prices. Not only will they need to be, but because Agri-Food commodities in general are operating in the price inelastic portion of the long-run supply curve they will. $7 corn this time next year is a real possibility, and much of the world will be glad to get it at that price.

Performance of Tier One Agri-Equities was also good in 2010, almost double that of the S&P 500. Tier Two, Agri-China equities, lagged during this period. In 2011 those positions will likely be reversed. Those Agri-Equities with exposure to the massive task of feeding more than 1.4 billion people have a long term wind to their back. That subtly aside, a portfolio without Agri-Equities will be at a serious disadvantage in the decade ahead.

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Agri-Energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com