Food Panic? That's So Over - TheStreet

Food Panic? That's So Over

Simon Constable says grain prices should be heading down soon. That may mean buying in the casual-dining sector.
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The much-heralded food crisis of 2008 could soon be over.

While some commentators are saying its time to hoard food, they may be a tad late to the party.

Well, maybe more than a tad.

In June last year, I warned that a

grain price spike

was coming. In September, I said it would likely

lead to pain

at the casual dining chains.

But that was then, this is now.

Starting last year, historically tiny global wheat inventories -- which were forecast to end the growing season at 45 days supply last year, but eventually fell to as low as 37 days recently -- pushed prices for the grain up to more than $13 a bushel by March. That's a record high for hard red winter wheat.

And it's that sort of elevated price and skinny level of grain reserve that probably caused the panic and the ensuing media spotlight.

Free Rice, Don't Panic

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But that's backward-looking, because it only reflects what happened as a result of last year's harvest.

The key for investors (unlike TV commentators) is to look forward. And there's the good news.

Traders -- and some notable agricultural experts -- are widely expecting the 2008-2009 growing season to provide a record harvest worldwide.

That's the reason prices for wheat futures have plummeted in recent weeks: The September contract now trades under $9 a bushel. That means it has retreated in value by more than a third from the record high just a few weeks ago, as traders expect increased supply of the grain as the harvest gets going in a few weeks.

As a result of that, inventories are expected to jump, says Bill Tierney, executive vice president of research and marketing at Washington-based futures brokerage and risk management specialist John Stewart & Associates. It won't be a one-time event -- it's likely to be a trend of increasing stockpiles for the next two growing seasons, he says.

It's an example of capitalism in action: high prices being the cure for high prices.

"The high prices brought a lot of places into production," explains Jerry Norton, grains economist at the U.S. Department of Agriculture in Washington, D.C.

"It would seem that if you have a significant recovery in the wheat situation, you would change the psychology of how the world views the food problem," Norton says.

As every high-school economics student knows, sustained increases in supply tend to lead to lower prices over time.

But although the grains traders and the agronomists have cottoned on to the situation, it's not clear that the equity investors have done so. That's why it could make sense to start reversing the trade suggested last year. Then, savvy investors suggested dumping the casual dining stocks.

The reasoning was relatively simple: The increased costs of wheat (which goes into bread and pizza), when combined with higher energy costs, would start to eat into profits at restaurants catering to price-sensitive diners.

The key inputs into both bread and pizza are wheat flour and energy, in the form of heat and transportation of the materials.

"If the high input costs can't be matched by price increases, then margins suffer," says Marc Pado, U.S. market strategist at Cantor Fitzgerald.

And that's what happened over the last year. Because unlike fine-dining restaurants, which can typically raise prices with some ease to preserve profits, those catering to more budget-conscious diners can't.

"But, if we were to have a bumper wheat crop and prices come back down, you likely won't see the end-product price come down as much as the costs," Pado explains.

That will mean the difference between costs and revenues -- margins -- will increase, so boosting profitability.

Pado does caution that it can take six months for changes in input costs to wind their way through the system, so investors will need to be patient.

Still, Jack Ablin, chief investment officer at Harris Bank in Chicago, says it might make sense to start nibbling at some stocks in the sector.

Papa Johns International

(PZZA) - Get Report

and

Kraft Foods

(KFT)

as well as

Sara Lee

(SLE)

, all look like good candidates, he says.

Investors might also want to scope out names such as

Dominos Pizza

(DPZ) - Get Report

,

Yum Brands

(YUM) - Get Report

, which owns Pizza Hut, and

Chipotle Mexican Grill

(CMG) - Get Report

.