We have all felt inflation pinching our wallets over the past year. This has been blamed on lack of employment, supply chain issues, and of course Covid-19. But most don’t realize that inflation is also caused by supply shortages, especially in the food sector.
Food is a global issue. There are many foods that we get from around the world because we cannot grow it here in the US, we just don’t have the climate for it. Take coffee for instance: it has to grow within 10° of the equator (subtropical) and at an altitude of 1800-3600 feet. The US is too far north and we get too cold in the winter, so we import the coffee from other countries that can grow it.
Brazil is the world’s largest exporter of coffee, sugar, soybeans, rice, cotton, edible beans, and wheat. That covers a very large basket of food. To grow all of this, they must fertilize it. Brazil imports 85% of its fertilizer, and most of that is from Russia or Belarus. As you know, there is a war going on in that region of the world, so it is going to be a bit difficult to get all the fertilizer needed for all their crops. Not only that, but Brazil, and other countries in the region, like Argentina, have also had drought problems. The positive side here is that that part of the world is in the fall now and will be getting into winter before long. This may help, and it’s possible the Ukraine war is settled by the time they need the fertilizer.
Speaking of Ukraine, they export 4% of the world’s wheat and they are the world’s largest supplier of sunflower seeds and oil. They are also a big supplier of neon, for neon lasers that make semiconductors, and we know that there is already a shortage of those. Time will tell how much Ukraine’s exports will be down, but estimates are between 30%-50% at this time.
Finally, we get to the US and the picture is not much better. Of our grain crops, 36% of the area that grows corn, 26% of the area for soybeans, and 73% of the area for wheat is in drought conditions. We need rain. It is bad when you hear some farmers that grow green beans and peas say that they will just plant corn and let it die from drought because they can get more out of the crop insurance. That does not help the food supply, but it will keep them afloat to plant another year.
Below is a daily chart of lean hog futures. In two months, they have rallied $0.30 per pound or 31%. Beef is the same way. If you look at grains (soybean chart below), they are up 40% since December, and wheat is up 47%. That is pretty substantial, and guess who gets to pay for that? Right, us.
Lean Hogs Daily Chart
Soybeans Daily Chart
We know we have high gas prices, but food prices are going to be higher, and if we can’t get rain and fertilizer, food will continue to climb. This does not help the fuel costs, because ethanol is created from grains (fermented and distilled). So buckle up and do a rain dance and hopefully this will be over sooner rather than later.
Trade to Win!
Geoffrey Smith
P.S. Each morning I go through a similar look at the markets for my Trade of the Day service. I analyze the overall markets and also look at my favorite thing to trade, commodities.
You can learn more about the Trade of the Day service by clicking here.