Food Inflation is Not Going Away Anytime Soon

Food Inflation is Not Going Away Anytime Soon

Inflation is one of the many issues facing markets across all asset classes in 2022. After blaming rising prices on supply chain bottlenecks and pandemic-related factors in 2021, the US Federal Reserve realized that inflation was not “transitory” but a structural economic issue created by the tidal wave of liquidity and tsunami of stimulus that stabilized the economy during the global pandemic. The Fed has already increased the short-term Fed Funds Rate by 75 basis points since March 2022, and another 50-basis point hike is on the horizon in June. The central bank has also started reducing its government and mortgage-backed securities holdings, pushing rates higher further out along the yield curve to curb inflation.

The Fed’s demand-side tools can be effective during normal times, but 2022 is anything but an ordinary time in history. The war in Ukraine, the geopolitical bifurcation between nuclear powers, US energy policies, and many other factors make the Fed’s job more than challenging.

One of the most significant factors facing markets is rising food prices. Central bank monetary policies may not control the increasing costs as they are supply-side instead of demand-side issues. While the US and Europe will face higher food bills, other countries could face shortages, causing famine. A government’s primary job is to provide food and security for its citizens. The full impact on the food supply will develop over the coming months and years.

Food demand rises with the population each year

• Each quarter the world’s population grows by approximately 20 million.
• The world will require more food in 2022 than in 2021 and less than in 2023.
• The world depends on bumper crops each year with more mouths to feed.

The supply-side factors pushing food prices higher in 2022

• The weather is usually the primary factor for the path of least resistance of grains and oilseed prices, but 2022 is not an ordinary year.
• Russia and Ukraine export one-third of the world’s annual wheat requirements.
• Russia and Ukraine are Europe’s breadbasket, putting pressure on other growing regions.
• The war is a supply-side issue, but rising fertilizer, equipment, labor, financing, and other input costs, are putting upward pressure on prices. Moreover, Russia is a leading fertilizer exporter, causing supply issues for farmers worldwide.

Soybeans, corn, and wheat prices have soared in 2022

• At $16.9775 per bushel, nearby soybean prices are 27.8% higher than at the end of 2021.
• At $7.27 per bushel, corn is 22.5% higher this year.
• At $10.40 per bushel, CBOT soft red winter wheat prices are 34.9% higher than on December 31, 2021.
• It will cost a lot more to eat in 2022 than in 2021.

History teaches higher food prices lead to civil insurrection and political change

• A government’s primary task is to provide safety and nutrition for citizens.
• Bread riots in Paris from 1787 through 1799 began because of food shortages.
• The 2010 Arab Spring that caused the political change to sweep across North Africa and the Middle East began as bread riots in Tunisia and Egypt.

Two food companies that are prospering as prices rise

• The leading food processing companies include the ABCD group, Archer Daniels Midland, Bunge Limited, Cargill, and Louis Dreyfus. Cargill and Dreyfus are privately held companies.
• Archer Daniels Midland (ADM) shares reached a record high of $98.88 on April 21 and were at the $87.91 level on June 3, up 30% from the end of 2021.
• Bunge Limited reached its most recent high of $128.40 on April 21. At $112.99 on June 3, BG shares were 21% higher in 2022.
• While the leading stock market indices are lower in 2022, the food companies have been a haven as rising food prices support earnings.

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