To The Moon

The Ukrainian war, soaring energy costs, bad weather related to climate change, shrinking arable land and the aftermath of corona in China will keep food prices high for much longer. Different businesses can benefit from this. In the food chain, however, there are big differences between producers and their buyers. Retail buyers in particular, but also food multinationals, are usually hard hit by rising 'commodity costs'.

Ukraine is considered the granary of the Soviet Union. It is fortunate that a quarter of the world's loess soils are located in Ukraine. This makes the country a major exporter of oats (20 percent), grain (7 percent) and maize/corn (19 percent).

The war started at the beginning of the sowing season. According to the UN Food Organisation, 20 to 30 percent less than normal will be sown, which may cause prices to rise further. Besides Ukraine, Russia and Belarus are also major exporters of agricultural raw materials and (artificial) fertiliser. As much as 79 percent of all nitrogen used as fertiliser comes from Russia, mainly due to the presence of cheap gas in Russia. Western sanctions have made it more difficult to trade. Russia has lost its status in the WTO, which means that countries can now impose a 35% levy. Chains have also been disrupted. Ukraine exports everything via the Black Sea. Belarus can now only export more via Russian ports. Belarus has banned the export of manure and sunflower oil. Russia has banned the export of grain, oats and corn from 14 March to 30 June, and the export of sugar is banned until 31 August.

A large part of the price of food consists of energy costs. Not only agricultural vehicles, but 80 percent of the cost of nitrogen (manure) is energy. The price of oil has risen sharply, so much so that the United States has released a large part of its strategic reserves. Below USD 80 per barrel, the US wants to replenish those stocks, but that will automatically put a floor in the oil price (and food prices). The food industry is also facing problems in the supply chain. About 7 to 10 percent of the cost price of agricultural commodities consists of transport costs. Furthermore, the packaging often consists of paper and cardboard, also prices that have risen sharply in a short period of time.

More and more agricultural land is being planted with trees (often for CO2 compensation). This is good for the climate, but it reduces the area of agricultural land. Because wood prices have also risen, with the CO2 compensation it is often more attractive to plant a forest (IRR of about 11%) than to continue farming. There are also increasing demands on farmers (for example, nitrogen emissions) that cause prices to rise. Agricultural land is also used for the production of green fuels (ethanol). E15 petrol contains no less than 15 percent ethanol. This also creates a stronger link between food and energy prices.

The weather has a major impact on the harvest. Stocks are low due to disappointing harvests as a result of the La Nina effect, most likely intensified by global warming. Grain production in Canada, the US and Argentina, for example, was disappointing, with grain rising by 30 percent even before the war in Ukraine. As much as 35 percent of all milk on the world market comes from New Zealand (via Fonterra). Due to bad weather, production fell by 6 percent, but now farmers in New Zealand are getting 30 percent more for their milk. Prices for milk powder are at their highest level in 8 years and butter prices are at an all-time high. This year, extreme rainfall is again predicted in the Pacific due to La Nina, but two months later than normal with a devastating effect on production. In the United States, 35 of the 48 states (61 percent of the area) are experiencing drought. In China, corona disrupts the sowing season. One-third of the farmers in Jilin, Liaoning and Heilongjiang cannot sow (because of a lack of seed and/or manure). These three provinces account for 20% of China's food production. Due to the lockdown, there are also insufficient seasonal workers.

Companies that benefit include fertiliser companies that are not dependent on Russia. For a company like Bayer, 46% of the turnover still comes from the agricultural industry. Furthermore, the drought, combined with the use of fertilisers, creates more demand for genetically modified seeds (with 6 to 25 percent higher yields), also stimulated because they can then be produced almost without using pesticides. The top four in this field are Bayer (through the acquisition of Monsanto), Syngenta (now part of China Chem), Corteva (formerly Dupont) and Vilmorin. Furthermore, there are many young start-ups in this field. There are also other alternative production techniques. For example, Novozymes make microbes that not only work as natural protection agents but also ensure higher productivity. Farmed meat, coated seeds and vertical farming all benefit from high food prices. Alternative protein producers, such as farmed fish, are also in demand.

Edible oils are often interchangeable. In addition to sunflower oil, there is also corn oil, soya oil, rapeseed oil and palm oil. Of all edible oils, palm oil is now three times more productive. However, there are ESG concerns about land grabbing and deforestation, among other things. However, it does mean that if you replace palm oil with other oils, three times as much agricultural land is required. Land which in turn is at the expense of the production of other food, resulting in higher prices.

Higher food prices are a major risk to social stability. For a good reason has consumer confidence in the United States and Europe already fallen sharply. That confidence is so low that it influences elections. In countries where a large part of the budget is spent on food, this development is disastrous. Expect more social unrest and revolutions and at least as many people fleeing hunger as those now fleeing Ukraine. The devil is also in the detail that hunger is not immediately visible, because people first use up their reserves, but over the course of years it can quickly escalate.