“How to earn 367% off American Retail’s “Seven-Ten Split.”

“Biggest jump in wholesale food prices in more than a year!”

– Associated Press, commenting on the Labor Department’s latest wholesale prices report

I know that Justice and I have gone on for some length now on the recent rise in agricultural prices. And I now am about to delve into that same topic – again.

By now, you are probably wondering if you have accidentally subscribed to the Farm Report. But hey – it beats another column on car companies, eh?

(Oh wait, here’s an item on cars after all. I was just perusing Chrysler’s list of doomed dealerships. No wonder they are going under: In my area, there are some 25 or 30 outfits on the list that are all within an hour’s drive of each other. Many are mere miles apart, and a few could probably throw rocks at each other on slow days. With that sort of insane saturation, sooner or later, something was bound to bust!)

And Now, Back to the Farm Report…

I have two reports on my desk right now with almost completely contradictory messages. I am talking a real “seven-ten split” here (a technical term I filched from the local bowling league).

The first lauds the fact that there was almost no drop in consumer prices in April. The Labor Department thinks that this is just peachy because it means that we are not locked in a hideous deflationary spiral.

Apparently this has been a real fear in some quarters of Washington, as over the past 12 months, consumer prices have fallen a whopping 0.7%, the largest such drop since late 1956-early 1957.

Be Careful What You Wish For

The same report also brags that there was not but so much inflation to be found either. Core prices (which exclude most everything you use on a daily basis, particularly food and gasoline) actually did rise 0.3% in April. And while this was the biggest such spike since last July, the bean counters reassure us that 40% of that rise resulted from a huge spike in the Fed’s tax on tobacco.

So far as Washington is concerned, “it’s the best of all possible worlds.”

You know, those guys in Washington really ought to re-read Voltaire’s Candide before putting out such jolly statements. By the end, the kind professor who coins that Pollyannic phrase suffers through bankruptcy, the Spanish Inquisition, the Lisbon earthquake, and syphilis.

The Dangerous Gap

Because the other report on my desk has the latest wholesale figures, and they are a tad disturbing for all sorts of reasons.

In April, we saw a 0.3% increase in overall wholesale costs. This gain was roughly three times higher than expected. Annualize this and you get a wholesale inflation rate of 3.6%. That’s more than enough to completely neutralize the 3.7% drop we’ve seen over the past 12 months.

What’s more, the actual extent of this rise has been disguised by certain internal disparities. Over that same stretch, wholesale crude oil fell 0.1%. (You could be forgiven for somehow missing this, as the refined gasoline sold to retailers actually went up 2.7%.)

The New Luxury Food: Eggs

It’s that old “non-core devil,” food, that is really soaring. Overall it went up 1.5% in April. If you annualize that, you get an 18% rate of climb. But wait – eggs alone went up some 44%. And that’s not annualized. That’s just the jump for April, making for the largest such increase in the past 17 years.

Oh, and just to dot the “I,” as it were, pharmaceuticals went up at an annualized rate of 12.6%, just as swine flu began sweeping through the nation. (What lovely people in that biz. Ah well, this is, after all a capitalist nation, and they certainly have the right to charge what the market will bear.)

The Worst of All Possible Choices

Going forward, those businesses must do one of three things. They must either lower costs further (not gonna happen), raise their prices (not gonna happen), or admit that they lost their shirts come the next round of quarterly reports (and unless something changes, that is sooo gonna happen).

A few companies that you particularly ought to keep an eye on: Sears (SHLD:NASDAQ) is particularly vulnerable to increases in cotton, wool and synthetic fabric costs, and also Safeway (SWY:NYSE), which will have to start posting “apologies” signs on the egg bins again.

You would be in good company in these positions. The former is already being played short in WaveStrength Options Weekly to the tune of 37% gains as I sit to write, with gains over 118% anticipated in the near future and a final target of 367% lurking just out over the horizon. The latter, I believe is being shorted by my cellmate, Chris DeHaemer.

Source: Costs Up, Sales Down – A Formula for Retail Disaster

More from Money Morning:

Like most other markets, Brazil has been battered by the credit crisis – the BOVESPA index is currently down 28% in October alone and no less than 52% from its peak as recently as May. It now appears to represent excellent value, with a historic Price/Earnings (P/E) ratio of only7.0.

But are Brazil’s prospects good enough to justify investing there?

Brazil was included in the “BRIC” (Brazil, Russia, India and China) group of rapidly emerging markets that Goldman Sachs Group Inc. (NYSE:GS) created in 2003. At that time the country didn’t deserve the distinction. Long-term growth since the 1970s had averaged less than 2% per capita, and the country had barely avoided bankruptcy in 2002. Every time the world had experienced a credit crunch, Brazil had been caught up in it, chiefly because of the country’s enormous international debt load.

Brazil got lucky. First, socialist President Luis Inacio “Lula” da Silva proved to be surprisingly moderate, not much to the left, economically, of previous Brazilian governments, perfectly willing to welcome foreign investment and generally friendly to the United States. Also, in 2003, energy and commodity prices began their long climb as part of a worldwide commodities rally that saw prices peak at astronomical levels earlier this year.

Since Brazil was not an oil exporter, there was no one single source of new wealth that the government could seize. Instead, revenue flowed to mining companies, the oil company Petroleo Brasileiro SA, better-known as Petrobras (ADR: PBR), and numerous agri-business operations that benefited from the rise in agricultural prices. It didn’t hurt at all when in November 2007 Petrobras discovered about 36 billion barrels of oil in an offshore Brazilian field.

Even Brazil’s ethanol program, which had been a hopeless boondoggle for a generation since it started during the oil crisis of 1979-82, suddenly became the envy of the world, as rising oil prices made Brazilian sugarcane the world’s cheapest and most economically and ecologically efficient source of newly fashionable ethanol. With oil prices down in the $20-a-barrel range, the ethanol-from-sugar program was a typical example of misguided Third World government planning. But at $140 a barrel, it was a bonanza.

Even at $60 a barrel, it is still a useful diversification from petroleum.

Brazil’s debt position improved after 2002 in three ways:

• The outstanding amount of debt has been reduced through modest repayments.
• Its ratio to gross domestic product (GDP) has dropped sharply, as GDP in dollar terms has shot up with the revaluation of the Brazilian real against the dollar.
• And its interest costs have dropped with Brazil’s improving creditworthiness and the generally low level of global interest rates.

Brazil’s ascension to “investment grade” status in spring 2008 appeared to cement the improvement in place; its public sector debt to GDP ratio in June 2008 was around 40%, lower than Britain’s, for example.

The financial crisis and economic downturn of 2008 has made life more difficult for Brazil. Oil and other commodity prices have sharply declined, reducing the value of Brazil’s exports. The real has declined over 30% against the dollar, increasing Brazil’s foreign debt, which is mostly dollar-denominated.

The Brazilian stock market’s decline will undoubtedly have a substantial negative wealth effect, making it more difficult for Brazilian entrepreneurs to finance new projects. On the other hand, a forecast by The Economist has Brazil still growing at 4.6% in 2008 and 3.4% in 2009, with consumer prices rising 6.0%. The Central Bank of Brazil has a good grip on inflation, with its Selic short-term rate at no less than 13.75%, while it is injecting funds into the banking system to battle the global liquidity shortage.

With continued economic growth, modest inflation, and stock prices at bargain levels for U.S. investors, Brazil is well worth considering. There are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40 to 50 more traded on the over-the-counter market.  A few attractive examples you might want to look include:

Banco Itau Holding Financeira SA (ADR:ITU). This stock features a Price/Earnings There are three large banks listed on the New York Stock Exchange: The other two are the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO). This is one of the true global blue chips. It has a market capitalization of almost $56 billion, and its stock has fallen by fully 75% since May. It is an iron-ore company with ancillary operations in gold, nickel, copper and other metals, and its shares are trading about four times projected 2008 earnings. The stock features a 5.0% yield. As one of the world’s low cost producers of iron ore, it should bounce back once conditions become more clear.

Petroleo Brasileiro SA, better known as Petrobras (ADR: PBR). Petrobras is one of the few emerging market oil companies with access to modern technology and willingness to work with the oil majors. Down by 60% in the last five months, the stock’s prospective P/E ratio is now only 5.5. It has a dividend yield of 1.3%. Petrobras remains a fairly low cost oil producer, since its production comes from conventional, albeit offshore sources.

Companhia de Saneamento Basico, also known as Sabesp (ADR: SBS). This is the water-and-sewage system for Sao Paulo. Now that’s a growth business, and is one that’s not dependent on commodity prices or on rapid Brazilian economic growth. The shares feature a P/E ratio of only 3.1 and a yield of 8.0%. This one must surely be a bargain; it has very little dependency on the economy.

Votorantim Celulose e Papel SA (ADR: VCP). This is a pulp-and-paper company, with a prospective P/E ratio of 6.0 and a dividend yield of 9.5%. Trees grow fast in the tropics; VCP benefits from that!

Finally, you should consider the Brazilian ETF, the iShares MSCI Brazil Fund (NYSE: EWZ). The fund was more than $5 billion in size at Sept. 30, and currently trades at a P/E of about 7.0 with a dividend yield of 3.0%.

As I said, Brazilian stocks are currently in the bargain-basement category, and well worth a look.

PS. Andrew Gordon at Investor’s Daily Edge recently said that Brazil was well placed to weather the current financial crisis. Read why Brazil is the best of the BRICs here.

Source: Six Profit Plays From South of the Equator

In a Chart of the Day installment back on December 28, 2007, I noted the price of rice at 20-year highs. (You can view that Chart of the Day here.) The reasoning was given as follows:

The relentless rise in agricultural prices shows how all markets are connected. The high cost of oil has encouraged a politically subsidized ethanol boom; this in turn has led to record corn acreage in the United States. But more acreage for corn means less acreage available for other crops. When acreage goes down, supply goes down. When supply goes down and demand stays strong, prices go up. The United States is the fourth-largest exporter of rice in the world, so that makes a difference.

Big economic strides in the developing world are also taking their toll on food prices. As hundreds of millions of new laborers aspire to a middle-class lifestyle, meat consumption rapidly rises. Meat is very grain-intensive — you have to feed the cows and pigs — and that puts an even bigger demand on crop acreage. As rice shows, the unfortunate reality is that the world’s poor may be the hardest hit by energy and food inflation.

That was all a mere 14 weeks ago. The price of rice has gone up 60% since then.

That is alarming news when you are talking about the main food staple for 3 billion people. The credit crunch is no small thing, but house-poor Americans are not starving. With the price of rice where it is, starvation is a real concern. Not just tens of millions, but hundreds of millions of families are at risk.

The headlines are getting worse as desperation turns to anger. “Food Riots Rock Yemen” is a recent example. The World Bank has declared 33 nations at risk for “social unrest” due to the high cost of getting something to eat.

So why the deadly acceleration of this long-running trend? Is it all down to biofuels and increased meat consumption in China? Unfortunately, no. Things have entered a much more disturbing phase.

Credit Crunch Redux

What we have here is a looming market failure with no small resemblance to the credit crunch. The global grain markets are caught up in a vicious cycle, not unlike the one that gripped global financial markets.

As the subprime crisis unfolded, and news of toxic balance sheets spread, it became clearer that lending to one’s fellow bankers was a dangerous proposition. And so the banks began to hoard their capital, keeping it to themselves for fear of getting burned.

The banks’ refusal to lend touched off a self-fulfilling prophecy of downward-spiraling credit conditions, to the point where leveraged financial institutions began to fail. As the financial system “seized up” like an engine in vapor lock, it took massive cash injections from a lender of last resort, the Federal Reserve, to get things going again.

In this new and deadly “food crunch,” grain exporting countries play the role of frightened banks.

With the price of grains going through the roof, government officials in grain-exporting countries have become alarmed by rising food costs at home. Their natural response has been to artificially limit grain exports, through the use of expensive tarriffs and outright quotas.

With normal supply lines cut short — or in some cases, cut off completely — the global grain markets have been tipped into a panic. Suddenly, the marginal suppliers are no longer there. If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.

No Luck for Farmers

Farmers everywhere (except, perhaps, in Europe and the United States) are furious at these export restrictions. The seizing up of the global grain trade has denied them an ability to profit.

After many years of struggle, when it looked like their hard work would finally be rewarded, many developing world farmers have discovered that they still can’t win. The export profits that would have come their way in a free market system have been diverted or destroyed instead, thanks to emergency measures from the local government.

The global food crunch is a “market failure” in the truest sense of the term. No one is really benefiting from this turn of events. The restrictive actions of grain-exporting governments are reminiscent of the Smoot-Hawley Tariff Act of 1930. Instead of a “beggar thy neighbor” policy, we are seeing the results of a “starve thy neighbor” policy. These tragic results are not intentional — but then, Reed Smoot and Willis Hawley probably didn’t intend to kick off the Great Depression, either.

Do countries have the right to punish their farmers in the name of national food security? A good question, but not one we are interested in here. Export restrictions are a driving factor in the global food crunch, whether anyone likes it or not. And so it becomes more vital to understand the effects than to debate the merits of the cause.

Hoarding Mentality

The anger of the farmers and the shutting down of grain supply lines has fueled a “hoarding mentality” that only intensifies as grain prices rise. Vertical price trends and scary headlines only reinforce the hoarding instinct.

As a result of all this, there is no simply no telling how high the price of rice and other food staples could go. In economist terms, food is the ultimate “inelastic good”; people have to eat, or they will die. Countries that are net importers of grain have to pay up, no matter the price.

So what can you and I do about all this? Unfortunately, not much.

It wouldn’t hurt for America to lay off the insanity of biofuel subsidies… burning up corn and taxpayer dollars in our gas tanks as the world wrestles with mass hunger. But that’s a problem of political will, a gigantic aircraft carrier that could take many years to turn around.

One thing we can do is recognize the importance of the agricultural supercycle. We will ultimately get through this global food crunch, one way or another. Somehow a long-run solution will be found.