There have been few better places for your money than in the agricultural stock sector in the past few quarters. This sector's outstanding performance has been attributed to the soaring prices of the commodities these companies help produce. When thinking of the best ways to invest in this sector, fertilizer and hybrid seed producers leap into the minds of investors. Unfortunately, some mistakenly lump food producing companies into this field of agricultural stocks. At first glance, an investment in a company that sells food to the consumer might seem to offer a way to play rising commodity food prices.

However, a closer look at these food production companies reveals troublesome negative correlation to rising agricultural prices. In spite of the bull market in soft commodities, Kraft Foods (KFT) is down nearly 15% and Tyson Foods (TSN) is off 20% in the last 52 weeks.

Tyson 1-year chart:

(chart courtesy of stockcharts.com)

Compare such results to a hybrid seed producer like Monsanto (MON), which is up more than 100%, and a fertilizer provider like Potash (POT), up more than 150%, and the difference is clear.

Monsanto 1-year chart:

(stockcharts.com)

The reason for the negative returns in food production company stock prices is simple, and it is directly related to the secular bull market in their core input prices.  In 2007, corn was up 17% despite a record harvest. Rice and soybeans are at record highs with soy trading at its highest level in 34 years. And wheat prices more than doubled in the last year, trading above $10/bushel for the first time in December 2007 before easing back to $9.60 in February.

What is important for investors to note is: the effect of rising commodity prices is lower margins for food producers. As evidence, just look at the recent parade of earnings blow-ups from Kellogg (K), Kraft Foods, Tyson and Pilgrim's Pride (PPC), all of which cited higher agricultural commodities prices as the source of their woes. Whereas growers, fertilizer and seed companies benefit from rising agricultural prices, livestock companies and consumer foods producers can only hope to pass along higher commodities costs to the consumer.

It is crucial to remember that end users of agricultural commodities are hurt by rising grain prices. Indeed, Tyson's CEO, Richard Bond, was quoted in the company's January quarterly earnings report as saying, "We have no other choice but to raise prices substantially. We are raising prices because we can't absorb these costs."

Irene Rosenfeld, CEO of Kraft, echoed the sentiment, saying, "In 2008, it's likely that pricing will be a much more significant factor as we offset higher input costs." The CEOs of these companies make it evident that when they raise prices they are only trying to recoup the cost associated with acquiring food ingredients, unlike genuine agricultural stocks that set these higher costs.

I suspect most readers of this article read the information above and have no trouble understanding the simplicity of the argument that consumer foods companies are harmed by rising agricultural commodities prices. Amazingly, however, we continue to see not just individuals, but professionals who seem confused by this concept, so I'll state the concept more succinctly: Kellogg is not an agriculture company.

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Disclaimer: Delta Global Advisors serves as portfolio advisor to the Delta Global Agriculture Portfolio UIT.