The Global Food Crisis Is Here (And Will Likely Worsen)

Editor's Note: Below is a note written by Hedgeye editor Eric Wallerstein and junior Macro analyst Ryan Ricci. For more insights like this, sign up for our free Weekend Reading newsletter.

When war erupts after one of the world's largest commodity exporters invades another large exporter, sparking international sanctions, etc... prices don't go down.

In the headlines: France is actively considering food stamps, fertilizer prices are up a mind-blowing +111%, and Bloomberg has suggested eating lentils as a weapon in your personal battle with inflation.

French President Macron said he was considering food stamp cheques for France this morning, given how the world is facing a global food crisis as a result of the Ukraine War (3/22/22).

The deleterious ripple effects of Russia's invasion of Ukraine on global energy & agriculture markets cannot be understated. 

RUSSIA & UKRAINE EXPORT DOMINANCE

Russia's invasion of Ukraine is not a Eurasian phenomenon, but a global one. Russia is a major player across energy, metals (cc: LME), and agricultural markets (and the leader in certain markets) while Ukraine has a sizeable footprint in both agriculture and metals as well. 

In other words, the formula of war + sanctions doesn't augur well for the global economy, and puts global food supply at risk.

As one would expect, energy prices have been skyrocketing since Russia's invasion of Ukraine... driving fertilizer prices higher.

• Natural gas is up +49% YTD
• Coal is up double Nat Gas; +98% this year alone
• Fertilizer Prices are up +111% year-over-year, up from the prior reading of 94%
• After a brief deceleration, prices have now surpassed the recent cycle high, and currently sit +113% above the top of 5-year range.

What's the correlation between energy and fertilizer? Well, energy is used to produce fertilizer. 

• Natural gas and fertilizer have a 0.541 correlation, while the relationship between coal and fertilizer is very strong, at 0.716.

Natural Gas up --> Fertilizer costs up --> Food prices up

Natural gas boosts fertilizer prices, fertilizer prices boost food prices. And the leading effect is already flowing through... 

• Wheat is up +26% in just the last month (49% year-to-date), hitting an all-time high in early March.
• Corn is catching up to wheat, up +10% in the last month (+27% year-to-date.)

U.S. INFLATION

Food prices lead U.S. Food-CPI by roughly 2 months.

Considering the general need for people to eat – the price of food is fairly important. With Food prices already ripping higher, the seeds to continue that rip have been planted with an acceleration in fertilizer inflation.

If you want to read about just how bad food inflation is getting, Bloomberg actually suggested over the weekend that we replace meat with lentils to combat inflation. For good measure, they added, "no one said inflation would be fun." Well, to be fair, policymakers have been making low inflation sound like an elusive economic feat for over a decade... but we digress.

With regards to headline inflation, food represents 15.4% of the overall CPI basket – a not-so-insignificant weighting.

While the Fertilizer to Food correlation should square in your head, mathematically, there’s a 0.47 correlation between the two.

So now we’re at:

1. Russia & Ukraine are major energy and agricultural exporters, and the war + sanctions portends higher prices in both
2. As energy prices move higher, fertilizer prices jump, leading to higher food prices (which are up anyway on lack of exports/supply)
3. Food prices are a not-so-inconsequential underlying component of headline inflation

Key Takeaway: Food Prices And Inflation Are Not Coming Down Anytime Soon.

Without opining upon the use-case for sanctions or whether they're needed or not, a war from one leading commodity exporter to another, with sanctions thrown into the fray, has a frightening impact on global inflation... and world leaders have taken notice.

This note written by Hedgeye editor Eric Wallerstein and junior Macro analyst Ryan Ricci is an update on our 3/2/22 article: "Global Food Crisis Risk Rising With Russia's Invasion Of Ukraine" For more insights like this, sign up for our free Weekend Reading newsletter.