Food Inflation About to Hit Hard

It is March 6, 2022 and food inflation is coming - supply chain disruptions will lead to the largest spike in world food prices ever recorded so far.

There are a few factors that are going to contribute to the most epic spike in grains to date.

1) Sanctions on Russian oil, when demand for oil is quite high and oil supply is low, are a huge problem when energy to run the machinery that enables modern agriculture is taken into account.

2) A lack of oil also mean a lack of fertilizer. On top of that, sanctioning Russia means fertilizer is harder to come by - Russia exports almost half of its ammonium nitrate and other key fertilizer ingredients abroad. Without the global supply chain providing that fertilizer, existing stocks of fertilizer are likely to run out in a quarter – likely well before new supply chains taking advantage of Russian stocks are set up. Remember – fertilizers and other inputs are what allowed food production to increase 5x. Without these, existing farms are significantly less efficient.

3) A quick Google search indicates that roughly 25%-29% of global wheat exports are from Russia and Ukraine.

4) We are about to see the results. Hungary’s decision to halt all grain exports is telling – the claim is that this is to provide for the large number of Ukrainian refugees, (which is indeed a sudden influx). The problem is – why should this problem stop at Hungary’s border? Why shouldn’t other European countries do the same thing when they will have the same refugee problem?

5)  When the average person on the street, now conditioned to hoard by COVID, sees a wheat shortage, it will get even worse.

Hence – the spike is, at this point, unavoidable. Bracing for impact is the best one can do. Here are some ideas to mitigate the problem:

1) DOE estimates roughly 5 billion bushels, or ~12M tonnes, of corn are used in ethanol. Eliminating ethanol mandates might free up enough corn to replace roughly half of Ukraine’s production of wheat (without getting into nuances of wet and dry milling). The drawback is that replacing the ethanol means adding more oil to fuel mixes, further increasing oil demand into a historic artificial oil shortage.

2) The US could encourage food production on land formerly held in reserve. However the effectiveness of such a program within the next few months would be limited.

It’s going to be an ugly summer. Individuals should stock up now. To be clear: grains will be available in the US. Of that there is no doubt as we are a huge net exporter. But the price one pays is going to be drastically higher for all foodstuffs - grain prices will lead to higher food prices across the board as animal feed, baked goods, etc are all impacted and people are forced to shift diet preferences.

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