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An Appetizing Affair

A trip to the grocery these days might leave shoppers gagging over the price of their dinner.

In fact, just last month, Italian consumers went on a pasta strike to protest the rising price of their beloved staple. Activists say Italians will soon be paying up to 20% more for their daily serving of spaghetti.

AP

Shoppers in France have also been complaining that their baguettes are become pricier. In August, a French consumer group warned of likely bread price increases of about 8%.

And look no further than the pork-loving Chinese. Ironically, the Year of the Pig has seen an acute shortage of pork. This issue has been hogging the headlines even as the government scrambles to curb food-price inflation. The August consumer price inflation of 6.5% was driven primarily by movements in the cost of pork. Pork alone accounts for around 4% of the basket used for the consumer price index, so movements in its price have a strong feed-through into inflation.

One reason for the rise in food prices is the great run that agricultural commodities have been seeing. After 25 years of falling prices, agricultural commodities are now enjoying a bull market that analysts predict could continue for years.

Wheat has been a standout winner, as it inches slowly towards the $10 per bushel mark. It has risen more than 83% in the past 12 months. Other agricultural products, if not at record highs, are at the best they have been in years.

Dairy has been turning in an outstanding performance. According to Rabobank, international dairy product prices roughly doubled to record levels during the last 12 months. And it is not likely to see a substantial correction in the short-term.

Moreover, supply for various reasons, appears to be at a precarious point, pushing prices higher.

In the case of wheat, shortfalls in parts of Europe, North America and Australia have triggered the run on prices. Last month, the U.S. Department of Agriculture said this year’s U.S. wheat crop might be lower than earlier estimated.

Australia, meanwhile, is projecting a vastly reduced crop size – 10 million metric tons – much lower than an earlier estimate of 15 million to 16 million tons, due to what it calls the worst drought in a century.

The severity of the drought in Australia has been so pressing that even banks have been doing their own rain dance. The National Australia Bank warned of a “desperate” need for rain across much of the nation's farmlands, saying that the outlook for the greatly distressed wheat crop is only getting worse.

And the heat is not only on wheat. Australia’s national cattle herd has been cut by 600,000 because of the lack of feed. After Brazil, Australia is the world's biggest beef exporter.

Ironically, these harsh developments have been golden opportunities for investors to harvest rewards.

The Fund

The DWS Global Agribusiness Fund invests in food, the most basic of human needs. Although not an entirely new concept, the fund claims that the idea of investing along all parts of the agribusiness chain is unique.

The fund is managed by DWS Investments, the mutual fund management division of Deutsche Asset Management.

With a total fund size of over $813.23 million, global investments range from agricultural commodities to consumer products – anything from land and plantation, seeds, plants and fertilizers, to harvesting, irrigation, food processing and manufacturing. The fund’s biggest sector-allocation is on agricultural products, which take up more than 26% as of August 2007.

About 60 to 70 stocks chosen for inclusion into the portfolio should possess characteristics such as a strong market position, favorable balance sheet ratios, strong management structure, clear corporate strategy and good corporate governance.

"Since the fund's inception on September 15, 2006, it has performed up 43.03% in U.S. dollar terms," says Bill Barbour, Investment Specialist at Deutsche Asset Management. "It’s not benchmarked against anything. Nothing like an agribusiness benchmark exists yet. We do measure ourselves against the MSCI but only as a reference. Currently the MSCI is up only 23.5%."

Barbour adds, "We recognize that people investing in the fund would have exposure to global shares. To add extra sources of alpha such as this would fit the bill."

The Affair

Prospects for the fund appear more than promising, especially with food prices recently showing signs of heading nowhere but up.

"Food prices, as a percentage of disposable income, have been in decline for probably 200 years. We believe that we will all be paying more of our disposable income for food in the future," says Barbour.

Nik Bienkowsi, Head of Listings and Research at ETF Securities, says fundamentals are supporting food prices. "We've been lucky with food prices over the medium- to longer-term," he says.

Forecasting the future of food prices has historically been an agronomist’s job, but now economists are just as concerned about it. There is a new phenomenon that they are keeping close tabs on: agflation.

Coined this year by Merrill Lynch, agflation refers to the recent rise in food prices worldwide. The increase is a result of rising demand for human consumption and for use as an alternative energy resource.

The issue that has triggered a lot of agflation concerns is fuel substitution. Crops such as soybeans – and especially corn – are used in the development of biofuel.

"We're seeing increase in tastes and demands that we've never seen before, [and] new sources of demand such as ethanol," Bienkowsi says. "The EU and the U.S. governments are both subsidizing ethanol production. And if the current targets are met by the year 2020, we're going to see that 60% of grains production is going to fuel, and not food."

Meanwhile, Barbour says the increase in prices is not a cyclical matter anymore. "There are four secular forces in play: population growth, growing incomes in the developing world, a limited supply of agricultural land, and competition for land from biofuels," he says. "These forces cannot be stopped by a credit crisis or rising interest rates."

At the rate things are going, food prices are expected to rise and demand will show no signs of waning. The United Nations says 80 million new mouths need to be fed every year. A lot of them will be from China and India, where rising incomes correlate with rising protein intake. The scramble to meet demand has never been so great, and investors willing to take a swipe at agribusiness plays could end up with a hearty dish.

Send us your questions and comments to us atfundaffair@cnbc.com.