Fertilizer Furthering Food Inflation

Gordon T Long

Global Macro Research | Macro-Technical Analysis

STRATEGIC INVESTMENT INSIGHTS

COMMODITIES

FERTILIZER FURTHERING FOOD INFLATION

Cost push inflation can often be absorbed within the production distribution process before attempted to be passed on to cash strapped consumers. Food which starts with the farmer is decidedly different because of razor thin margins. Any cost to the farmer must be passed on or the farmer is immediately unprofitable. If the basic crop is rice, wheat or corn, it is a major problem because these food sources are a basic source of food for the poor. Wheat it is the source of the core ingredient four any kitchen – flour, the vast population survives on rice and corn is used in other food stuffs as well as animal feed.

Disruptions here have already had serious global ramifications but are now impacting American farmers and US food suppliers.

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WHAT YOU NEED TO KNOW

Fertilizer shortages primarily the result of Russian sanctions and the Ukraine War impacting Ukraine crops are causing massive and unprecedented disruptions to the global food supply,
It is the sanctions on Russia that are a problem well beyond Ukraine, as Russia also produces around 20% of global ammonia and 20% of global potash supplies. These are key ingredients to fertilizers used in large scale industrial farming. Farmers are estimating an overall price spike of around 10% in food markets, but this is very conservative.
We are already witnessing overall price increases of at least 20% from six months ago, and many expect there to be another 30% in price hikes before this year is over. In other words, we are looking at 50% in average increases in 2022.
We have witnessed with almost every authoritarian regime in modern history that control over the food supply is key to controlling the population. It is only surpassed as a strategic concern by control over energy (which we will also see shortages of as soon as Europe sanctions Russian oil and gas, and starts eating up supplies from other exporters). The food issue hits closest to home because we can see the effects immediately in consumer wallets and family needs. There is nothing worse for any parent than the prospect of their children going hungry and quickly leads to major social disruptions and riots.
The problem for farmers and resulting food shortages however isn’t just fertilizer, it’s the cost of Diesel fuel and the political games being played to foster a shift to Green Energy. Both the price at the fuel pump for food transportation and also for new “bio-fuels” is being thrust on farmers.

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FARMING: A “RAZOR THIN” MARGIN INDUSTRY

Any disruptions or cost increases in farming go directly to the consumer. There is no room in farming to absorb cost increases anywhere. This includes the following areas under inflation attack!

- Planting
  - Fertilizer & Fuel
- Harvesting
  - Fuel – Special Blend
- Transport
  - Fuel – Diesel

We will explore all three cost areas below but first consider the impact of “cost push” on a low cost industry which the poor survives on.

A “STARVATION” CEILING ON FOOD PRICES FOR THE GLOBAL POOR

The world was already rife with hunger before Covid-19 struck. In 2020, up to 811 million people – nearly one in 10 people – did not have enough food. Now the world is hurtling towards an unprecedented hunger crisis. Global hunger increased steadily during the COVID pandemic and now a whole host of other factors are accelerating matters. At this point even Joe Biden is admitting that the coming food shortages are “going to be real”, and therefore his administration just announced that a whopping 670 million dollars will be directed to nations where things have already become quite desperate.

The U.N.’s World Food Program (WFP) points out that millions of Middle Eastern and North African families now struggle to buy even the most basic foods to keep hunger at bay. It warned that a toxic combination of the conflict in Ukraine, economic disruptions due to COVID-19, and bad harvests, are driving food prices to record highs.

“People’s resilience is at a breaking point. This crisis is creating shock waves in the food markets that touch every home in every region. No one is spared.”

Corinne Fleischer, WFP Regional Director

500 MILLION PEOPLE

According to Bloomberg, the global fertilizer crisis is going to result in a loss of Rice production worldwide that is the equivalent of enough food to feed “500 million people”!

The global fertilizer problem begins with a problem in RICE production, which has been quickly aggravated by a problem in WHEAT production, and then CORN production. These are the central building blocks of food and food products (flour).

RICE:

“From India to Vietnam and the Philippines, prices of crop nutrients crucial to boosting food production have doubled or tripled in the past year alone. Lower fertilizer use may mean a smaller crop. The International Rice Research Institute predicts that yields could drop 10% in the next season, translating to a loss of 36 million tons of rice, or the equivalent of feeding 500 million people.”
We don’t eat that much rice in the western world, but in Asia it is a core staple of their diets.

WHEAT:

Agricultural commodity experts are warning that the war in Ukraine alone could mean that “between 19 million and 34 million tons of export production could disappear this year”.
“Globally, there are six breadbaskets that together supply roughly 60 to 70 percent of global agricultural commodities. The Ukraine–Russia region is responsible for roughly 30 percent of global exports of wheat and 65 percent of sunflower, in a context where those markets are increasingly tight and interconnected—so a slight disruption in supply creates some impact on price.“
Between 19 million and 34 million tons of export production could disappear this year. By 2023, the figure could be between ten million and 43 million tons. To translate, that represents caloric intake for 60 million to 150 million people.
“Global food prices rose to their highest-ever level in March, the United Nations Food and Agriculture Organization reported April 8, with wheat prices up nearly 20% from a month earlier.“
“According to the USDA, 69 percent of total U.S. winter-wheat production is in an area experiencing drought, including hard-red winter, soft-red winter and soft white. That includes 82 percent of the production area in Kansas, 82 percent in Colorado, 99 percent in Texas and 99 percent in Montana.“
Morocco’s agriculture minister said: “the North African country would likely lose 53 percent of its cereals harvest after experiencing the worst drought in decades. Rainfall was 41 percent less than average this season.”

CORN:

Russia and Ukraine are normally two of the largest global exporters of corn, but now the war has changed everything, and there have been very serious planting delays here in the United States.
“Chicago corn was largely unchanged on Wednesday and near a decade-high scaled in the previous session, as traders fretted over planting delays in the United States and a lack of supplies from war-torn Ukraine.”

The risk of uprisings is increasing by the week as the UN projects food prices to soar even higher. It’s important to note that food prices were already rising before the Ukrainian conflict.

SURGING GLOBAL FOOD PRICES

March’s food price index from the Food and Agriculture Organization of the United Nations (FAO) was up 33.6% from the same time last year.

The March rise in food prices is a stunning 12.64% MoM – almost double the previous record monthly surge.

Leading the charge was the FAO Cereal Price Index, up 17.1% in March than in February, entirely driven by significant price increases in wheat and grains as a result of the Black Sea breadbasket region going offline. This is a result of the Russian invasion of Ukraine and sanctions-related supply disruptions by Western countries on Russia. The invasion has choked off more than a quarter of the global wheat trade, about a fifth of corn and 12% of all calories traded globally.

FOOD RIOTING HAS BEGUN

In South America, inflation riots have already begun as the government declared a curfew last weekend. Arab Spring 2.0 appears to be emerging, but this time it could be global, unlike a decade ago. Last week, in Lima, Peru, people were protesting fuel and fertilizer price hikes in San Martin Square.Separately, the most reliant countries on Ukraine wheat, including Egypt, Indonesia, Bangladesh, Pakistan, and Turkey are the countries that could see unrest next.

FOOD PRODUCTION

PLANTING

There is growing concern farmers worldwide are reducing chemical fertilizer, which may threaten yields come harvest time, according to Bloomberg. The repercussions could be huge: Lower yields may exacerbate the food crisis.

There are alarming signs commercial farmers in top growing areas in the world are decreasing the use of essential nutrients — nitrogen, phosphorus, and potassium.

“Fertilizer supply issues will remain a problem for a few years and will soon result in declining yield production of crops in some of the world’s top growing regions. It’s not if, it’s when.”

CBoT trader Tommy Grisafi

(Also Risk Advisor at Commodity Trading Firm Advance Trading Inc.)

SLC Agricola SA, one of Brazil’s largest farming operations, managing fields of soybeans, corn, and cotton fields in an area larger than the state of Delaware, revealed last week it will reduce the use of fertilizer by 20% and 25%.
Coffee farmers in Brazil, Nicaragua, Guatemala, and Costa Rica, some of the largest coffee-producing countries, are expected to spread less fertilizer because of high costs and shortages. A coffee cooperative representing 1,200 farmers in Costa Rica predicts coffee output could slip 15% next year because of soaring fertilizer costs.
The news from Brazil is very alarming because 80% of the country’s farmland is very reliant on fertilizers, and more than 85% of its fertilizer is imported from abroad (susceptible to disruptions).
Brazil is also a top ag exporter of coffee, sugar, soybeans, manioc, rice, maize, cotton, edible beans and wheat. If future harvests decline because of less fertilizer usage, this could then exacerbate the global food crisis that the Rockefeller Foundation expects to hit “in the next six months.”
The International Fertilizer Development Center (IFDC) warned a reduction in fertilizer use would shrink yields of rice and corn come harvest time. Farmers in China, India, Bangladesh, Indonesia, and Vietnam — the largest rice-producing countries — are spreading less fertilizer, and may result in a 10% reduction in output, equating to about 36 million tons of rice, or enough food to feed a half billion people.
More fertilizer equals more food production; Less fertilizer equals lower food production. It’s a simple concept to understand and may suggest an even larger food crisis is on the horizon.
The US won’t be spared. Chairman of the Kansas Wheat Commission Gary Millershaski said his “biggest fear” this spring is that farmers in North America skip out on applying nitrogen to wheat plantings. He said, if farmers did this it might suggest harvests would be a “lower class of wheat.”
In March, Tony Will, the chief executive of the world’s largest nitrogen fertilizer company CF Industries Holdings Inc., warned: “My biggest concern is that we end up with a very severe shortage of food in certain areas of the world.”
Rockefeller Foundation President Rajiv Shah provided Bloomberg Television’s David Westin with a timeline of when the “massive, immediate food crisis” begins. He said: “in the next six months.“

WAS

IS BECOMING

Manure Supplies Tighten As Fertilizer Prices Soar

HARVESTING

Tractor and equipment fuel is a big variable cost of farming. Tractors, agri-equipment and agri-pumpsets use 13% of the diesel produced. Those prices have almost doubled! Trucking (to transport food to retailers) is guzzling approximately 28.25% of diesel produced.

Tractor fuel is a standard number 2 diesel. It’s a low-grade fuel that is in between gasoline and diesel when the distillation of crude oil is happening. As such, a tractor can theoretically go 700 km on one liter of fuel. However, tractors typically tow heavy weights and additionally often act as auxiliary power for the equipment they are pulling. Diesel itself has the advantage, to begin with, in that there is more heat value in diesel fuel than in gasoline. Further, spark engines run fuel-rich for cooling purposes, while diesels run on the lean side of stochiometric (the ideal combustion process where fuel is burned completely).

Farmers are now trapped in the exploding costs of Diesel fuel.

As Zero Hedge reports: Crack Spread Are Soaring As Diesel Market Braces For Historic Shock.

“While the market’s attention – and certainly that of the administration – has been focused on the surge in gas prices due to their vast political implications, the real action – and threat – is in diesel,” as discussed extensively and most recently in “Why Every American Should Care That Diesel Prices Are Surging Across The Country“, and also in the following articles from the past 3 months:

“Well, with every passing day, D (for Diesel)-Day approaches, and as Bloomberg’s Natalia Kniazhevich observes today, the crack spread – or profit margins from products such as gasoline, diesel and jet fuel – reached the highest since the freak oil collapse of April 2020, confirming what we have been saying since January, namely that shortages in fuels like gasoline and diesel are greater than in crude oil.”

FOOD TRANSPORT

TRUCKING

As the national average for diesel prices at the pump jump to a record

“I get video almost every day now from people who we featured on ‘Dirty Jobs” and ‘How America Works.”
“They’re just sending me videos of them at the gas pump and some of them are filling up 18-wheelers. And, I’m not kidding you, $1,100, $1,200.”
“Most people, all we can think about is the price for us at a relative terms know it’s awful.”
“When you put $1,200 in your gas tank and just six months ago it was costing you $600 or 700, the exponential reality of it is starting to sink in. You just can’t walk that back. It touches every single thing that matters in this country. From food production to transportation … all of it,” Rowe explained.

Farmers use diesel to power most of their machinery. According to the Diesel Technology Forum, diesel is critical to the farming industry.

“One reason why U.S. agriculture is among the most productive and economically valuable in the world; producing more yield in less time with fewer inputs, is thanks to the advancements in the machines and equipment that do the planting, harvesting and tending to the land. Today, diesel engines power the majority of agricultural equipment in the U.S. and around the world necessary to plant, cultivate and harvest crops and transport them to markets or for processing and then delivered ultimately to the consumer.

Diesel engines power more than two-thirds of all farm equipment, transport 90% of its product and pump one-fifth of its water in the United States. Ninety-six percent of the large trucks that move agricultural commodities to railheads and warehouses are powered by a diesel engine. One hundred percent of the freight locomotives, marine river grain barges and ocean-going vessels that deliver these products to markets at home and abroad are powered by diesel.”

In the past 15 years, the number of refineries on the U.S. East coast has halved to just seven. The closures have reduced the region’s oil processing capacity to just 818,000 barrels per day, down from 1.64 million barrels per day in 2009.

Weekly petroleum data from Energy Information Administration’s (EIA) Crude Oil Inventories show East Coast distillate inventories are at their lowest ever, dropping to just 22.4 million barrels.

“In the agricultural sector, there is no cost-effective substitute for diesel engines with the same combination of energy efficiency, power and performance, durability and reliability. Diesel dominates the entire “farm supply chain” – planting the product, tending the crop (watering, fertilizers, and pesticides), harvesting the product and even bringing the product to market by truck, rail or ship. Farm tractors, combines, irrigation pumps and other equipment are the workhorses in an industry vital to our national economy and quality of life. Nearly every fishing vessel around the world uses diesel for power. Without diesel, our fishing food supply chain would collapse.”

Diesel also powers the construction industry. From the Diesel Technology Forum:

“Roughly 850,000 diesel-powered vehicles nationwide are in use bringing supplies, materials and workers to and from U.S. construction sites. Earthmovers, bulldozers, bucket loaders, backhoes, cranes, pavers, excavators and motor graders are all essential to building and expanding our economic infrastructure. For most of these machines, there is simply no substitute for diesel power. No viable alternative has yet emerged for equipment that exceeds 500 horsepower; some construction engines produce several thousand horsepower.

Since diesel powers the industrial economy, the recent surges in prices will put additional inflationary pressures on the U.S. economy – in the sectors that have already experienced unprecedented inflation – transportation, agriculture, and construction.”

RENEWABLE DIESEL v BIODIESEL

I’M FROM THE GOVERNMENT AND I AM HERE TO HELP: A NEW DIESEL ADDITIVES PROGRAM

The environmental lobby has now convinced government officials worldwide that “renewable carbon content” is prima facia a desirable thing – a fallacy that deserves its own “Doomsberg” piece. Various mandates exist to literally take food out of the mouths of the hungry and pump it into our trucks for burning. For the planet, and whatnot.

The first commercially relevant incarnation of a diesel substitute derived from crops is a product known as biodiesel. Oils derived from palm, sunflower, soybean, rapeseed and castor are used as inputs, to name a few, and they are reacted with methanol (derived from fossil fuels) in a chemical process known as transesterification.

Transesterification generates a product with higher oxygen content than standard diesel. This presents some challenges, including poor low-temperature performance, increased microbial growth, corrosion of engine parts and higher shipping costs. (Biodiesel cannot leverage existing pipelines that are used to transport regular diesel). Much like corn ethanol, biodiesel is blended with regular diesel at concentrations between 2-20% before being marketed. Despite these limitations, government mandates have motivated farmers the world over to redirect a sizable chunk of their crops from the grocery store to the gas station.

Nearly all of the challenges with biodiesel have been overcome with the recent development of renewable diesel, a material synthesized by hydrotreating cooking oils. Here’s how the US Energy Information Agency (EIA) describes the differences (emphasis added throughout):

“Renewable diesel is a biomass-based diesel fuel similar to biodiesel, but with important differences. Unlike biodiesel, renewable diesel is a hydrocarbon that is chemically equivalent to petroleum diesel and can be used as a drop-in biofuel that does not require blending with petroleum diesel for use…
Because renewable diesel is a drop-in fuel, it meets ASTM D975 specification for petroleum diesel and can be seamlessly blended, transported, and even co-processed with petroleum diesel.”

Where will all this renewable diesel come from? In the US, soybean oils are the main input. It should come as no surprise that planting strategies are being quickly modified to produce more of it. This quote from an industry consultant frames the magnitude of the upcoming disruption well:

“The dramatic development of the U.S. renewable diesel industry is similar to how ethanol changed the U.S. corn industry from 2007 to 2010″, says Dan Basse, president of AgResource Company. But he believes renewable diesel could be more disruptive.
“We are calling for 90.5 million soybean acres in 2022 versus this year’s 87 million, and that just gets us started in meeting renewable diesel demand,” he says. “Then we’d need to increase soybean acres by 5 million to 7 million each year. We have to top 120 million acres of soybeans to meet the growing demand for renewable diesel.”

With the force of the government’s thumb on the scale of demand compounding pre-existing inflationary pressures hitting farmers, the price of soybeans has soared to fresh all-time highs. At the time of this writing, soybeans trade for $17 per bushel, more than double the price seen just two years ago. Unless these policies are unwound, it is difficult to imagine a scenario where positive price momentum abates.

In the face of a global energy crisis, the war in Ukraine, food shortages and rampant inflation, does it make sense to be redirecting so many acres of valuable cropland to make renewable diesel, a fuel we can easily and directly drill for domestically? Do our policymakers understand the interconnected nature of these markets, and how forcing a strong link between diesel and soybeans creates a tunnel through which the contagion of crisis in one market bleeds directly into the other? Imagine how grotesque this spectacle must seem to the most vulnerable among us. While they scramble to secure enough edible food to survive, our elite know-it-alls gorge themselves on the most delicious hors d’oeuvres the cocktail party circuit can provide. Through either shocking ignorance or callous indifference, they convince themselves they are saving the planet.

CONCLUSION

Food…fertilizer prices @ all-time highs

= cost of food production up

= supply of food down

= price of food up!

Note corn prices @ new highs & food prices seriously vulnerable to super-spike on poor harvests.

When The Food System Breaks Down, Everything Will Break Down With It!

SHORTAGES ACROSS THE BOARD ARE ABOUT TO GET WORSE …

MUCH WORSE!

WE CAN EXPECT A CRUSHING ASSAULT ON THE US STANDARD OF LIVING OVER THE NEXT DECADE

Americans Are Spending More, Getting Less and Borrowing More To Pay For It!

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