Food prices could rise by as much as 45% as a result of lower crop yields caused by this summer's drought, says Michael Underhill, a Pewaukee investment manager.
Damage to the corn crop is so extensive that farmers have abandoned more than 10% of the fields, said Underhill, founder and chief executive officer of Capital Innovations LLC in Pewaukee. Ranchers, fearful they won't be able to feed their herds amid rising prices, have been bringing their livestock to slaughter early.
"The process has already started in which abnormally high food inflation will be evident," Underhill said.
Stocks in the farming and fertilizer areas have performed well so far, he said.
Potash Corp. of Saskatchewan Inc. (POT, $42.78), Saskatoon, Saskatchewan, is one stock Underhill likes. It is a fertilizer and related industrial and feed products company whose shares could trade as high as $62 in the next six to 18 months, he said.
But there are companies in Brazil - a growing agricultural powerhouse - that are also attractive, Underhill said.
"The certainty of feeding people is much more profitable and powerful than the probability of whether an individual is going to upgrade their handheld device or their iPad," Underhill said.
Brazil is among the top three nations for exports and production in most agricultural commodity markets and is expected to maintain that edge, given its vast expanses of arable land and good weather, soil and farming techniques, he said.
Infrastructure constraints and difficult transportation logistics have long been cited as obstacles to continued expansion of Brazil's agriculture industry. But Underhill said he sees those as short-term cost factors that the country will overcome.
Brazil is accelerating development of an infrastructure that will serve its agriculture industry. For example, major upgrades are planned in the port of Santos, such as a covered berth in one of its sugar terminals, Underhill said. Also, some major rail projects are expected to be completed by 2014 that will open access to major ports, reducing costs and increase export traffic to Europe and Asia, he said.
Brazil has had abnormally high rainfall amounts this year. Moisture damage will shrink sugar and coffee yields but has not affected corn and other livestock feed grown there, Underhill said.
"They're not suffering like farmers in the U.S. Coffee and sugar are being damaged, but corn can absorb that water," he said.
Shares of many non-U.S. companies trade in American markets through American depositary receipts. Known as ADRs, these bank-issued certificates represent shares of companies that trade on foreign exchanges.
BRF Brasil Foods SA (BRFS, $14.43), Itajai, Brazil, is a food processor involved with meat, dairy and vegetables. These ADRs have traded in a 52-week range of $13.61 to $21.70.
BRF does wholesale distribution in South America, where countries such as Argentina, Brazil, Chile and Paraguay have younger populations and need protein-based food for their emerging middle classes, Underhill said.
The risks with both these shares are the potential that feed prices could rise dramatically, people could stop eating as much protein, or there might be disruptions in the supply chain, he said.
BRF shares could trade as high as $37 in the next six to 18 months, Underhill said.
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