With Thanksgiving quickly approaching, you’ve probably noticed that this year’s holiday dinner is costing quite a bit more than in previous years.

According to data released by the US Department of Labor last Thursday, food prices have risen 1.7 percent over the past year. That’s due in large part to this year’s historic drought, which severely damaged the corn and soybean crops. Because these crops are also used to feed livestock, the higher prices that resulted from their shortage have impacted the price of meat, poultry and dairy products.

Although the price of meat and poultry initially fell during the drought, hard-pressed farmers culled herds and flocks, which tightened supply. And now the seasonal spike in demand from the holidays is creating additional pricing pressure.

While holiday meals are a source of short-term demand, global population growth continues to fuel the long-term rise in demand for agricultural commodities. A number of global organizations, including the United Nations, project the global population will reach 9 billion by 2050.

In the short term, crop production has struggled to keep pace with emerging market demand, as the ranks of the middle class continue to swell in developing nations such as China, India and Brazil. That’s driving demand for staple foods, such as grains. Additionally, greater wealth in some formerly agrarian economies has boosted demand for diets rich in protein, which in turn puts further strain on the ability of food producers to accommodate demand.

Meanwhile, the US Federal Reserve is making its own contribution toward food price inflation. Under the leadership of Chairman Ben Bernanke, the Fed continues to pursue an inflationary monetary policy, keeping interest rates low and reportedly planning more bond purchases next month as part of the latest round of its so-called quantitative easing (QE3).

As long as unemployment remains above 7 percent, the Fed will likely keep buying at least $40 billion worth of bonds each month. Since the Fed has set no time limit on QE3, if those purchases were to go on for a full year, that’s $480 billion of cash added to the money supply.

While that monetary stimulus has prompted only mild inflation so far in the US, it has the potential to eventually weaken the US dollar and drive a bout of inflation. Unfortunately, food and energy prices tend to be extraordinarily sensitive to rising inflation.

But higher food prices wouldn’t just be a localized problem, thanks to the massive globalization of our food supply. If, like me, you enjoy fresh fruits and vegetables during the winter months, you’re likely buying products from a number of South American and Asian countries. 

Although a spike in food prices is unlikely to have a great effect on the US–Americans only spend about 7 percent of their incomes on food–higher food prices have the potential to create serious problems in many parts of the world. In the Middle East, families allocate as much as half of their income to spending on food, while in some poorer parts of Africa, the average family can spend as much as 90 percent of its income on food. And while Asia fares relatively better on this front, families there still spend about a third of their income on food.

As a result of growing populations and potential weather disruptions, there are strong short-term and long-term factors driving higher global food prices.

That should benefit Market Vectors Agribusiness ETF (NYSE: MOO), whose portfolio holds 51 names, all of which derive at least 50 percent of their total revenues from agricultural products, equipment and chemicals, or the transportation of such products. In short, the fund offers exposure to all facets of the agriculture business.

Top holdings include Potash Corp of Saskatchewan (TSX: POT, NYSE: POT), which is a leading fertilizer supplier, as well as Monsanto (NYSE: MON) and Syngenta (NYSE: SYT), two of the world’s best known seed and chemical outfits. Other holdings, such as Deere & Co (NYSE: DE) and Kubota Corp (Japan: 6326), are leading manufacturers of agricultural equipment, such as tractors and irrigation systems.

Following the drought, MOO’s share price jumped from about $45 to more than $52 this past October. Since then, its price has pulled back slightly, as the market digested the impact of severe weather events on the global food supply.

The fund’s annual expense ratio is just 0.56 percent, which is relatively cheap for such broad exposure to the sector. More than 80 percent of the fund’s assets are allocated to large and supersized companies, lending it a great deal more stability than its small-cap peer IQ Global Agribusiness Small Cap ETF (NYSE: CROP), which has been gaining in popularity over the past year or so.

As farmers till more of their fields to take advantage of higher agricultural commodity prices and, as a result, buy better tractors and more fertilizer, look for Market Vectors Agribusiness to break out of its recent trading range and resume its move higher.

What’s New

No new exchange-traded products were launched last week.