For a very long time in America we've enjoyed a seemingly endless, cheap, and abundant variety of foods from all over the globe.

Although for many of us, our understanding of food supply and what it takes to get it all on the grocery store shelves is very limited. Somehow, it just magically appears!

The problem: Like so many of our other natural resources, we have simply taken for granted the costs associated with producing, harvesting, packaging, and shipping the items we have come to expect at the market each day.

But with fuel prices and other costs surging, we are seeing ...

The End of Cheap Food

Today, in emerging markets such as India and China, there is exponential growth and a new middle class that is demanding things they've never had before. Millions of cars, better housing, electronics, and above all ... better foods.

Demand has surged for things like meats, better quality grains, soft commodities including coffee, cocoa, and sugar. This huge increase in demand is rapidly outstripping supplies of many key resources, and putting a strain on an already overloaded agriculture system.

On top of the global surge in demand we are seeing a decline in quality agricultural acreage and arable land in many regions, mainly due to an increase in poor farming methods. In China for example, poor hillside farming techniques are quite common. And antiquated farming equipment is often still the norm.

China is about the same size as the U.S., but they only have about 11 percent arable land compared to 26 percent in the U.S.

In addition, much of the once abundant younger rural population has fled the farms for the chance of a better life and increased pay in the larger cities and factories. This migration has left behind an elderly and dying rural population that simply will not be able to sustain the growing food demand.

Meanwhile, China has been racing to secure arable farmland anywhere it can, gobbling up land in South America, Europe, and especially Africa. China has made huge investments in parts of Africa and has secured vast amounts of arable land, mining resources, and even a new built-in workforce. China's influence is so widespread that many people are now referring to parts of the Dark Continent as Chafrica.

The Chinese leadership realizes the dire situation they face if they don't secure long-term supply lines for food and other raw materials for their people. The widespread unrest this year in the Middle East in places like Egypt, Tunisia, and Libya, in large part was ignited because of surging food and fuel costs. This is very worrisome to the Chinese leadership, as civil unrest in China could be uncontrollable once ignited.

More Hungry  Mouths to Feed

According to the U.S. Census Bureau, the current world population of close to 7 billion is projected to exceed 9 billion by the middle of this century. To put those numbers in perspective, in 1950 there were only 2.5 billion people.

As global population explodes demand for food, fuel and land will increase at a frantic pace as nations work to secure long-term supplies from all corners of the Earth.

High Costs Going Much Higher

Of course higher prices for agricultural products help farmers, but at the end of the day their input costs have soared as well. Costs for things like fertilizer, equipment, irrigation, seed, and most of all, fuel.

Farming is a very energy intensive business, and as diesel and other fuel costs soar those increased prices roll downhill to the consumer in the grocery aisle. And energy costs don't just impact the growing process ... it also significantly increases the cost of packaging and certainly transport.

As food prices climb, along with everything else, those costs are hitting Americans in the wallet — hard. In fact many people are being forced to make extremely difficult choices. Things have gotten so bad right now that we have over 44 million Americans on food stamps, a grim new record high, according to the latest data from the U.S. Department of Agriculture (USDA).

While surging food and gas prices are hitting Americans with a one two punch, those same prices are even more devastating for poor and developing nations, and often can often become a matter of life and death.

This is only expected to get worse ...

According to a June 17, Organization for Economic Cooperation and Development Report, "Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one."

2011 has been a rough year so far, as widespread natural disasters have caused major crop delays and damage around the globe. Flooding in much of the U.S. has virtually wiped out many farmers' chances of getting any crops in the ground this season. And those who have gotten crops in the ground, risk a very hot, dry summer which may kill corn and other crops that were planted late.

In addition, many farmers are now worried that because they got the crops in late they may risk an early freeze before they can harvest.

Simply put: 2011 is setting up to be a very expensive year for agriculture and potentially a very profitable one for those who are invested in it.

Do I Think Commodities
Are in a Bubble? No Way!

Seems these days that everywhere I go, investors and fund managers are concerned about the rising costs of commodities. They're always asking me if this is a commodities bubble and when it will burst, and when will prices return to the cheap levels we are used to.

My answers are always the same: This is not a bubble, and the chances of prices falling by any significant amount are slim to none.

Even now, we still have the die-hard dollar bulls coming out and claiming that we really don't have inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I strongly disagree.

I believe a small move up in the dollar will continue a bit longer as the euro seemingly crumbles because of Greece.

However, longer term I think the same problems that drove the dollar into the ground will persist, and even worsen. The Fed has dug a hole that is too deep to climb out of, no matter how much funny money they decide to print.

Sure, speculation is a part of this picture. But to lay the blame on the farmer's doorstep or to say it's all speculators and hedge funds causing the run-up is a sad mistake.

Real physical demand and the weak U.S. dollar policy are two of the biggest reasons. And I don't see demand for commodities going anywhere but higher longer term.

One thing you can count on is that everything from milk to yogurt and steak to eggs is going up in price — and not just a little, a lot!

That's why as consumers and investors, we must look for ways to hedge ourselves against those costs we all are facing in the grocery aisle.

Grow Your Profits!

I believe one of the best ways right now to take advantage of the rising agriculture market is by using commodity ETFs. And if you like extra leverage, you can use ETF options. Some potential opportunities I like are:

PowerShares DB Agriculture ETF (DBA) — An unleveraged ETF with broad exposure to agricultural commodities including soybeans, cattle, sugar, corn, coffee, cocoa, hogs, wheat and cotton.

PowerShares DB Agriculture Double Long ETN (DAG) — A 200 percent leveraged long ETN focused on wheat, corn, soybeans and sugar.

iPath Dow Jones-AIG Grains Total Return Sub-Index ETN (JJG) — This exchange traded note is solely focused on the three primary grains: Wheat, corn and soybeans. It uses futures contracts to establish the positions in these grains, the same approach as the PowerShares ETFs.

But before you jump into a trading strategy for the rising food and fuel markets, always get advice from an expert who understands the resource markets inside and out ... these markets can be very fast paced indeed.

Kevin Kerr has successfully traded commodities professionally for the last 22+ years. He a regular contributor to news outlets including CNBC, CNN, FOX News, CBS Evening News, and Nightly Business Report.

Source: http://www.moneyandmarkets.com

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