Food Costs Could Crimp Global Growth

"Food inflation charts are pretty disturbing and will doubtless see further increases move through into the U.S. CPI and PPI," says an internal research memo issued to traders at J.M. Finn in London on March 16. "Do note that the key component driving Chinese inflation is the food side of their calculations. It is very hard to see how [second-half 2007] sees inflation tailing off within China as some notable commentators say they expect."

From an investment perspective, food manufacturers such as General Mills (GIS Quote), Kellogg (K Quote) and Tyson Foods (TSN Quote) may be some of the hardest hit by the hike in food prices.

"All food manufacturers are making price adjustments," General Mills Chairman and CEO Steve Sanger said in an interview with Dow Jones Newswires last week. "We're no exception to that."

In Mexico, manufacturers have already started to feel the pain of the inflation, with political consequences. In January, Mexico's President Felipe Calderon was forced to impose a price cap on tortillas of 35 cents a pound, after thousands stormed Mexico City's Central Square in protest of the massive rise in recent prices of tortillas.

Tortillas are a staple in the diets of most Mexicans and a key component of the Mexican economy. The price cap, which is 40% more than the price for tortillas only three months ago, is still generating political tension in the country. The hike in tortilla prices is believed to be a result of the demand for corn ethanol, generated by President Bush's recommendations for a fourfold increase in the use of the substance in his new "cleaner energy" initiative.