Food, Energy Prices, and Inflation - Beyond the Fed’s Monetary Policy Reach

Last week, we heard from the Federal Reserve’s Open Market Committee, and the FOMC did not deviate from its inflation-fighting stance. Another twenty-five-basis point hike put the Fed Funds Rate at a midpoint of 4.625%. While the central bank has shifted its gears lower from 75 and 50-point increases in the short-term rate, it now costs just under $1.5 trillion annually to service the enormous $31.5 trillion U.S. national debt. The Bank of England and European Central Bank followed the Fed with fifty basis point increases in short-term rates.

The central bank inflation fighters continue to attempt to extinguish the inflationary fires that many economists warned resulted from the tidal wave of liquidity and tsunami of government stimulus programs during the worldwide COVID-19 pandemic. Pushing inflation to the central bank’s 2% target rate could be frustrating as the highest food and energy prices in years are supply-side economic issues. The bottom line is that the Fed has a significant impact on the U.S. economy’s demand side, but not so much when it comes to the supplies of raw materials that fuel and feed the country and world.  

Commodities are global assets, and international markets reflect the economic and geopolitical landscapes. The U.S. remains the world’s leading economy, and many countries follow the U.S. Federal Reserve, but supply-side economic issues are beyond the central bank’s pay grade.

Food prices remain at multi-year highs

• Nearby CBOT soybean prices at over $15.25 per bushel are at the highest price since 2014.
• The soybean crush spread (processing spread for crushing soybeans into oil and meal) rose to a record high in 2022 and remains near record territory at over the $2 level.
• The last time nearby CBOT corn futures were above $6.75 per bushel before 2021 was in 2013.
• CBOT soft red winter wheat futures at over the $7.50 per bushel level are at a ten-year high.
• Many U.S. bread manufacturers price their requirements using the KCBT hard red winter wheat futures contract. The multi-year average of the hard versus soft red winter wheat futures spread is a 20-30 cents premium for the hard red winter wheat. The spread, at well over $1 per bushel, signifies supply and price concerns as consumers are hedging requirements at the highest level in years.
• In 2022, sugar, coffee, oranges, and many other agricultural prices reached multi-year highs. Last week, FCOJ futures reached a record high.
• Beef, pork, poultry, milk, and egg prices rose to multi-year highs in 2022.
• High energy, labor, and fertilizer prices and shortages increased production costs, pushing food prices higher.

Oil is above $70, and natural gas has been frightfully volatile

• Nearby NYMEX WTI and Brent crude oil prices rose to the highest since 2008 in 2022 at over $130 per barrel before correcting.
• The U.S. Strategic Petroleum Reserve sales pushed nearby NYMEX futures to $70 and Brent to $75 per barrel.
• The SPR is at the lowest level since December 1983 at 371.6 million barrels. The Biden administration has said it plans to purchase oil for the SPR at the $70 level after selling at an average of $96 per barrel. The most recent low in NYMEX crude oil was $70.08.
• European natural gas prices rose to record highs in 2022 as concerns over Russian pipeline supplies caused panic. U.S. natural gas prices probed above the $10 per MMBtu level in August 2022 before correcting below $2.35 per MMBtu in February 2023.

Coal and ethanol prices remain steep

• Coal futures for delivery in Rotterdam, the Netherlands, rose to $465 per ton in March 2022 before correcting to $137 on February 3, 2023. Before 2021, the high was $224; at the $137 level, Rotterdam coal was at the highest pre-2021 price since 2008.
• Coal futures for delivery in Newcastle, Australia, rose to $457.80 per ton in September 2022 before correcting to $230 on February 3, 2023. Before 2021, the high was $139.05; at the $230 level, Newcastle coal was in record territory.
• Chicago ethanol swaps reached a record $3.45 per gallon wholesale in November 2021. At $2.1800 per gallon, they are at the highest pre-2021 price since 2014.

War in Ukraine is highly inflationary

• The ongoing war in Ukraine has turned Europe’s breadbasket in Ukraine and Russia and the critical logistical hub at the Black Sea Ports into war zones.
• Russian retaliation to sanctions from “unfriendly” countries supporting Ukraine has limited or banned fertilizer, energy, and other food and energy exports.
• Russian influence with OPEC, the international oil cartel, has led to production cuts that keep prices elevated. Russia depends on petroleum revenues to fund its aggression in Ukraine.
• S. energy policy supporting alternative and renewable fuels and inhibiting hydrocarbon production and consumption has increased OPEC’s pricing power.
• Fossil fuels continue to power the world. Moreover, China and India account for over one-third of the world’s population and continue to consume increasing amounts of global oil, gas, and coal production.

The bifurcation of the world’s nuclear powers distorts trade flows

• The “no-limits” alliance between China and Russia and the increasing nuclear capabilities of North Korea and Iran have bifurcated the world’s nuclear powers.
• Global tensions have trade ramifications, creating trade distortions.
• Commodities are global assets, and while production occurs in countries with supporting climates and significant reserves in the earth’s crust, consumption is ubiquitous. War and deteriorating relations impede cross-border commodity flows.
• Supply-side roadblocks to the free trade of food and fuels are immune to Fed inflation-fighting monetary policy initiatives as they tend to address demand.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!