2022 Theme: A Pricey Loaf - The Implications of Rising Food Prices

Since inception, another near constant theme of this newsletter has been that energy costs will rise.

And they have!

This past week, the favored US crude benchmark, WTI, surged above $90 a barrel for the first time since October 2014.

The causes of this advance are many: surging demand, exceptionally tight supply, political missteps (the US banning more drilling) and political calculation (Russia keeping gas exports to Europe low) as well as structural shifts such Wall Street turning against debt fueled shale oil exploration and the rise of renewable energy projects and declining funds for fossil fuel energy production.

But the end result is the same: the era of cheap energy costs seems to be over.

We could easily see $100 oil and, it is very possible that we could go far higher.

It isn't as if the catalysts aren't there.....Iran, Russia/Ukraine, OPEC, another Texas deep freeze (remember that!) etc.

But it is unlikely that energy will be able to reproduce 2021's gains and, frankly, if they did they would destroy so much economic demand (high prices would hurt the economy) that it would be a short lived moment and the very definition of a Pyrrhic victory.

One newer impact of higher - and one that will likely impact every reader of this newsletter - is rising food prices.

These have already risen. Quite steeply.

As with energy, this would be the highest point in many years. Here is the Bloomberg Agriculture Index which has risen to its highest point since 2013.

Unsurprisingly, higher agriculture commodity prices are feeding through to higher global grocery bills.

See the United Nation's Food and Agriculture Organization and their FAO Food Price Index:

The Index reached a 10 year decline in 2021 and, despite a small December reversal, it rebounded in January by 1.1% and, we argue, will likely continue to appreciate in 2022.

The U.S. Labor Department’s consumer-price index, which tracks inflation has a section on food, of course. Their food-at-home index rose 6.5% in 2021, the largest over-the-year increase since 2008.

The index for meats, poultry, fish and eggs increased 12.5% from 2020 to 2021, while fruits, vegetables, cereal and bakery products were also more expensive.

The trend is pretty clear and we have not gotten to any of the many climate events that are also playing havoc with farmers' ability to produce enough crops.

There are two additional points to make here:

  1. The first is that for a lot of Westerners, the increase isn't quite so steep. The actual price of food is only around 15% of what you are paying for at the grocery (packaging and preservatives are pricey, so is marketing).

  2. The second is that, while the price of agricultural commodities may have risen a lot in 2021, it may be nothing compared to 2022.



  • There is a connection between costly energy and pricier food and

  • There is a lag between the former and the latter.

What explains the link here?

The simple fact is that natural gas accounts for about 80 per cent of the variable costs of some essential nitrogen fertilizer components such as ammonia.

And fertilizer prices have more than doubled in the past year. They may double again. Especially in Europe.


If gas prices remain very elevated then the domestic fertilizer industry from the likes of Yara or BASF will simply cease to function. We wrote about this problem back in September when we discussed why some fertilizer companies would shutter their production rather than pay for extremely expensive natural gas.

This of course leads to less fertilizer production in Europe and greater imports - including from the likes of Belarus and Russia. There is a whole other dimension to this whereby these states' central role in providing fertilizer make it exceptionally difficult to impose meaningful sanctions.

For now, the August-September spike in natural gas prices hasn't proven to be temporary. Quite the opposite.

This is putting Northern Hemisphere farmers in a serious bind. They have to put fertilizer on their dormant fields but are being forced to pay up exorbitantly to do so.

Therefore US and European farmers have a choice to make: can either skimp on the application of the newly pricey stuff or they can pay up and pray they will be able to make a profit.

  • If they chose the former (or rotate away from fertilizer heavy crops like corn) then the prices of those commodities will continue to rise in 2022.

  • If they chose the latter then their costs will be far higher (again) in 2022 compared to 2021 and they will demand to be compensated.

Lower yields and elevated asking prices are a nasty combination for any sector of the economy but are doubly problematic when it comes to food.

As we have sadly discovered, people can forego a cruise or go a year without flying or even eating in restaurants but everyone (we think?) needs to eat.

You have likely already noticed your grocery bill rising and unfortunately, this is very likely only the beginning.

And spare more than a thought for the many people in less fortunate countries. Lower yields and higher prices could cause food insecurity in less resilient, import-dependent countries.


Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.


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