Input Costs Soar

High Energy Prices are Contributing to Food Inflation

Jake Hanley, Managing Director/Portfolio Manager                                    

The 18% advance in global food prices over the last year has largely been due to internal market supply and demand fundamentals.[1] Now, however, external market forces, namely energy prices, are threatening to help push food prices even higher. 

Energy prices push fertilizer costs up nearly 150% YTD

Green Markets North America Fertilizer Price Index. The X axis represents time, and the Y axis is the index level. The measurement in green represents the percentage movement of the index. Source Bloomberg Finance L.P. Generated on 10/22/2021. This chart is for illustrative purposes and not indicative of any investment. Past performance does not guarantee future results. For more information on the Green Markets North American Fertilizer Price Index please visit https://fertilizerpricing.com/priceindex/.

Soaring natural gas prices are the primary factor contributing to higher fertilizer costs. Just as natural gas is a key input for fertilizer production, fertilizer is a key input for food production.

Elevated fertilizer prices have the potential to push food prices higher in two ways: 

(1) Farmers may look to pass higher fertilizer prices on to end-users by increasing the selling price for their crops

(2) Farmers may cut back on fertilizer use (potentially negatively impacting yields) or limit the number of acres dedicated to crops that typically require relatively more fertilizer, resulting in lower overall crop production.

Corn Acres May Be Up for Grabs

Corn requires more fertilizer than wheat or soybeans. In fact, if we look at the non-land costs for producing corn, fertilizer may account for as much as 30% of the total this year, up sharply versus last year.

This may lead farmers to reduce the number of corn acres they plant for the 2022-2023 crop year. Fewer corn acres planted suggests lower corn production next year, which in turn might be bullish for prices.   US corn supplies are already at 8-year lows, and prices remain elevated although they have receded from the highs reached in March 2021. Prices may have to move higher to entice farmers to plant more corn, otherwise, we would expect to see soybeans and wheat gain acres at corn’s expense.  

End users would certainly welcome a boost in US wheat and soybean production. Both wheat and soybean inventories are at near-decade lows relative to expected demand. Wheat prices are trending higher and may soon run up toward $8 per bushel, a psychological level that the market hasn’t seen since early 2013.  

Soybean prices on the other hand, like corn, have receded from their Spring 2021 highs, but remain elevated. Increased US soybean plantings would likely act as a headwind for soybean prices. However, soybean inventories are predicted to remain relatively tight in comparison to prior years, which may limit price relief for buyers, at least for another growing season or two.  

No End in Sight

Our view is, and has been for some time now, that higher food prices are not “transitory.” We believe that even with near-record yields and production it will likely take another growing season or two to right size global balance sheets.

Higher fertilizer costs threaten to compound the issue. A reduction in yields and/or fewer acres planted might help prolong the supply/demand imbalance thereby extending the period of higher prices.

Follow the Money

As mentioned above, the advance in fertilizer prices is due to soaring natural gas prices. Energy prices, including natural gas, are rising for a myriad of reasons but ultimately it boils down to supply and demand. Even with energy prices trading around 7-year highs, demand appears to be robust, and supplies are not keeping pace. The persistent demand may in part be explained by monetary and fiscal policy. 

Money remains extremely cheap, even free for some. The availability of money across the globe is likely helping to prop up demand for both energy and agricultural crops, even in the face of higher prices. 

If “higher prices are the cure for higher prices,” as the saying goes, then the question is how high is too high? Where is the tipping point?

We will find out eventually, though given that the world is awash cheap and/or free money, we’re not likely to find out anytime soon. 

[1] UN Food and Agriculture World Food Price Index is up 18.29% between December 31, 2020 and 09/30/2021. Source Bloomberg Finance L.P.