Eric Fry

Food is the ultimate regressive tax, which is why it might offer some of the most compelling investment opportunities of the next ten years.

The prince dispenses the same number of tuppence for his crumpet as the pauper. But as a percentage of their respective incomes, the crumpet is much more costly for the pauper. This contrast is obvious, but the implications of this contrast for global food prices may be less obvious.

The poor spend as much as they possibly can to nourish themselves. The wealthy spend as much as they wish. In fact, because the cost of food does not rise commensurately with incomes, the cost of food becomes so trivial to the wealthy that they end up tossing the stuff into trashcans.

For perspective, consider the econo-caloric history of the United States, as it progressed from “Emerging Market” to Superpower. According to the Federal Reserve Bank of Dallas, the average American in 1919 had to work two hours and 38 minutes to buy a 3-pound chicken. Nowadays, it takes just 15 minutes.

In statistical terms, Addison Wiggin observes in the latest edition of Apogee Advisory, “Americans spent 23.4% of their disposable income on food in 1929. By 1950 this number had dropped to 20.6%. By 1975, 13.8%. The number finally cracked single digits in 2000. And that figure includes meals eaten both at home and away from home.

Disposable Income Spent on Food

“Compare that to Germans,” Addison continues. “They spend 11.4% of disposable income just on meals eaten at home. The French, Japanese and South Koreans spend about 14-15%. Brazilians? 24.6%. And the Chinese spend 39.4% of their disposable income on meals eaten at home.

“Even Canadians, with a much smaller population and their vast productive prairies, aren’t as lucky as we are. They spend 9.2% of their disposable income on meals at home. That’s nearly as much as Americans spend both home and away.”

Therefore, imagine a world in which the global population is rapidly increasing, and in which a growing percentage of that growing population is progressing from mere sustenance levels of existence to conditions of relatively greater prosperity.

You don’t need to imagine such a world; it has arrived.

As the major Emerging Markets of the world like Brazil, India and China continue their progression from chronic underachievers to periodic overachievers, their national wealth will increase. And as this wealth increases, the recipients of it will certainly increase the quantity and/or quality of their diets.

Even if the quantity does not increase much, improving the quality of diet would be sufficient to drive food prices much higher. Replacing one meal of beans and rice, for example, with a meal of chicken and rice may not seem very significant. But it requires 6 pounds of grain to produce one pound of chicken meat, according to the USDA. Therefore, if hundreds of millions of individuals begin opting for chicken over beans, the global grain markets would certainly feel the effects…and these effects would not be limited to the grain markets.

As the organic food website, www.opes.biz points out, “It requires 700 gallons of water to produce one pound of chicken. Instead, farmers could produce 16 pounds of broccoli, or up to 20 pounds of other grains and vegetables… Also, it takes 8 times the amount of gasoline/fossil fuel for production of one pound of chicken as compared to one pound of protein from tofu.”

Therefore, forward-looking investors cannot afford to avert their gaze from global dietary trends. As the Emerging Markets continue to emerge, demand for the world’s finite supplies of grain, water and energy will increased commensurately…and that means much higher prices.

“Americans have become accustomed to cheap and abundant food,” Addison winds up. “Probe the psyche of the average American and he’d probably tell you it’s a birthright. Amber waves of grain and all that. They’re about to get a rude surprise. After a century in which Americans have spent less and less of their incomes on food, the trend is about to reverse.”

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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