No Soup for You?
Telemus Weekly Market Review March 28th - April 1st, 2022
If Elaine Benes of the television show Seinfeld were to walk into the local soup restaurant today, she’d probably get sticker shock before being kicked out by the owner for wasting his time! In fact, the owner may be close to closing the doors due to his skyrocketing costs that will only increase in the short-term.
If you thought recent gas prices were enough to put a dent in your extra-curricular spending cash, prepare for prices at the grocery store to continue their ascent to even higher levels. That soup bowl that previously was so full and hearty, is certainly going to be a whole lot more brothy. Behold, the UN Food & Agriculture World Food Price Index depicted in the chart below.
UN Food & Agriculture World Food Price Index (Source: Bloomberg)
Breaking out to new all-time highs is something a trader loves to see when it’s an asset they hold, because a break into new territory is more often followed by a significant momentum move in that direction. When it’s the cost of your food however, that leaves a bad taste in one’s mouth.
So why exactly is this happening?
Farmers need fertilizer in order to meet the timeline and yield of a planting season. Fertilizer needs Nitrogen. Nitrogen is largely produced with natural gas.
Queue the second snowball.
2021 was a tumultuous time for the natural gas market globally. You may recall news headlines in the back half of last year about the crisis in Europe surrounding energy prices. Demand was rebounding after the covid slowdown as economies got back to business, producers were slow to hike output on uncertainties, a colder and longer previous winter of 2020 left inventory levels low, and just like Europe previously, even China was moving away from coal production, meaning increased competition for natural gas.
The next chart tells two stories.
Green Markets North America Fertilizer Price Index (Source: Bloomberg)
First, you can see where the smaller horizontal green line starts (at the middle of 2020), fertilizer prices started to rise on the back of the headlines out of Europe. There wasn’t as much natural gas available globally, so fertilizer prices naturally had to go up. But that wasn’t all that was going on. Gas imbalance, combined with inflation worries and the rise starts to become vertical. From the start of the 2020 winter to the end of 2021, prices had risen three-fold.
The second story of the chart is our third snowball effect. Russia. We’ve all heard how, Germany especially, became so reliant on Russia for energy supply. A catastrophic error for the country and other parts of Europe, which has a ripple effect on everyone. Rightfully so, when Russia invaded Ukraine the global powers started trying to sanction Russia, and natural gas is a big part of the equation.
The United States is the leading supplier of natural gas at over 21% of world supply, but Russia is second at almost 15%, with the third largest producer coming in way lower at less than 6%. Trying to cut out 15% of world production of natural gas, a key component in fertilizer production, makes the scary and exponential rise we’re seeing in fertilizer prices make sense. I fear the future drop won’t be anywhere near as dramatic as the rise. Western countries are unlikely to just start accepting Russian natural gas if the war ends. It will take at least a couple years for global supply chains to readjust with the U.S. likely filling the void among western economies. There are a lot of politics standing in the way that take time to resolve.
So where does all of this leave us? Supply and demand will find a balance, it always does. But in the meantime, it seems unlikely that prices will fall quickly. Canned vegetables instead of fresh and brothier soups may be more appealing for some that struggle with further sticker shock.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016. The Green Markets Weekly North America Fertilizer Price Index is constructed using the fertilizer benchmark prices of US Gulf Coast Urea, US Cornbelt Potash and NOLA Barge DAP. The index is value weighted based on the annual global demand of each nutrient. For current year pricing we use fertilizer demand forecasts from the Green Markets Research.
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