You don't need me to tell you that, over the past six months, food prices have been climbing through the roof of your neighborhood grocery store. A combination of factors have brought food inflation upon us, including greater worldwide demand, isolated food shortages, weather and currency swings. The price of oil has also had an impact. Not only do higher fuel prices make farming and the transporting of foodstuffs more expensive, but the production of alternative fuels, such as ethanol, has also pushed up corn and other grain prices.

On Wall Street, the themes of food, feed and seed have been safe bets over the past six months, as the demand for all three have led to the sharp rise in agricultural and commodity prices. Investors have been pushing higher the stocks of seed producers like Monsanto (NYSE: MON) and fertilizer makers like Potash Corp. (NYSE: POT) and Mosaic (NYSE: MOS). In the index world, indexes that track agricultural commodities have been on a nearly uninterrupted climb. The benchmark Dow Jones AIG Commodity Index is typical of the year-to-date trend.

The problem with using the Dow Jones AIG Index to represent agricultural performance is that the index is too broad. It includes all commodities, including energy, petroleum, precious metals, grains, livestock and agriculture. Fortunately, to hone in on the agricultural components, Dow Jones gave us subindexes that are focused on single agricultural products. The subindexes are a bit harder to get data on, but we are able to dig up charts that show us how robust the recent agricultural track record has been. Here's the one-year chart of the Dow Jones AIG Soybean Oil Sub-index (DJAIGBO):

Likewise, the Dow Jones AIG Corn Sub-index shows how the May floods in the Midwest, and the demand for corn-based ethanol, have pushed the price of corn higher.

What's With Wheat? 

The wheat market has been a little more interesting, and is not a carbon copy of the other agricultural indices. A few weeks ago I wrote a piece on the lack of "convergence" (futures and cash prices coming together) in the wheat market. Factors such as sharply higher barge rates (the price of actually shipping the commodity); high futures valuations; and a large carry in the futures markets (the costs of actually holding a physical commodity, e.g., for insurance, storage and interest) explain why the price of spot wheat often trades askew from the price of wheat in the futures markets. These same factors may explain why the Dow Jones AIG wheat sub-index has a flatter one-year chart than the other agricultural indexes

Will the bull market in agriculture and agribusiness continue for the rest of 2008 and beyond? The charts of most agricultural indexes have topped off this past month, and have even dipped, indicating a potential retreat. For investors in agricultural ETFs or futures indexes, one of the keys to the agricultural commodity markets over the next six months will be the weather. In recent days, corn and soybeans fell to the lowest point in six weeks on speculation that warm, wet weather will hasten plant development and boost the yield potential of the two crops. As we've known since we planted our first tomatoes in the backyard, excessive dry spells are bad for crops. Since severe heat in the nation's heartland is not forecast from now until the end of August, we should expect our farms to be more bountiful. So agricultural investors should anticipate greater supply, and with increased supply comes lower prices.

Corn prices are a prime example of where the market may be heading in the near future, because of better weather. Corn has plunged 20% in the past month, driven lower by ideal growing weather in the U.S. Corn Belt, and a big drop in oil prices. Corn had soared to nearly $8 a bushel in June as the Midwest was ravaged by floods, but the return to warmer, dryer (but not too dry) weather has revived crops, and corn is now down to $6 a bushel.

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