Montreal, Canada

China is moving once again to implement price controls. The implications for long-term investors are bullish as the entire food chain becomes increasingly fragile in the age of rapid industrialization, declining crop yields and volatile weather patterns.

Chinese consumer prices rose by 4.4% in October — well above the government’s 3% target. Several large Chinese cities have begun to initiate a cap on food prices as local officials worry that surging costs might trigger a civil backlash.

Back in mid-2008, a series of food riots broke out across more than two dozen developing economies amid skyrocketing food prices.

Agricultural commodities soared in 2008 because of poor harvests and severe droughts in most grain growing regions, excluding the United States; governments implemented price controls in some markets to stem rising inflation and civil disorder; but now that dilemma is back to haunt governments in late 2010, as a host of agricultural commodities surge since June; the latest announcement of the Fed’s QE II, or quantitative easing, has unleashed a big rally in raw materials since Labor Day.

In 2010, even the United States, the world’s largest exporter of corn and other coarse grains, is facing a significant decline in yields, according to the USDA. The United States, Latin America, Australia and the Ukraine are the breadbaskets of the world. Most of these grain growing regions have witnessed a collapse or serious decline in crop output since last spring.

While farmers are making a killing over the last several years combined with soaring land prices, the end-user in the emerging markets is suffering from rapidly rising food costs; unless governments in these markets race to cap food prices, another wave of civil unrest looms in many of these countries.

Speculators, however, see things differently. From an investors’ point of view, the entire grain infrastructure chain is home to one of the biggest secular bull markets in history over the next decade. Everything from farm equipment to grain elevators to grain processing will earn a bundle as prices continue to rise and demand grows even faster. Prices for most of these companies are already near 52-week highs.

One area worth avoiding, however, is the food sector. Most companies won’t be able to successfully pass on rising prices and will have to depend on shrewd commodity hedging to protect their margins – something most companies fail to do consistently.