The Crisis Neither Biden nor the Fed Can Fix


Commentary

Supply chain disruptions arising from the COVID-19 lockdowns have crippled the shipment of goods of all kinds around the world.

Everything from toilet paper to cleaning products to antibiotics to household appliances have been struggling to get to their final destination. A poll run in October 2021 indicated that 54 percent—over half—of Americans were experiencing “delays or shortages in trying to buy ordinary consumer products.”

But there’s another product, even more important than all these, that is facing a global supply crunch as well.

Food.

If you’ve been noticing more empty shelves than usual at the grocery store, it’s not your imagination.

According to Geoff Freeman, the President and CEO of Consumer Brands Association, “U.S. groceries typically have 5% to 10% of their items out of stock at any given time; right now, that unavailability rate is hovering around 15%.”

But where food shortages go, supply chain issues are only half the problem. There is another massive shortage of a key resource that goes into the production of nearly everything we eat.

Fertilizer.

The Looming Threat to the US Food Supply

Studies have shown that 48 percent of the world population in 2008 was dependent on nitrogen fertilizers for their daily access to food. Today that equals roughly 3.5 billion people.

And when it comes to farming, fertilizer is not something you can take out of the equation if prices get too high.

Fertilizing farmland provides two essential functions. Aside from just feeding plants, fertilizer actually increases crop production. It allows farmers to grow more crops per acre. As crops are grown and harvested, they drain minerals from the soil so fertilizer is also key in revitalizing the soil.

Where farmers are concerned, fertilizer represents the biggest expense they have to absorb. And the bad news is the price of fertilizers, when they can get them, have more than doubled in the past year.

The cause of these soaring prices comes from a number of sources.

First, there’s a shortage of the chemical ingredients needed to produce fertilizer. And the costs associated with its production are going sky high as well.

Commercial fertilizers all require three key chemicals to provide nutrition to the soil it’s applied to: nitrogen, potassium, and phosphorus.

Ammonia is the key ingredient in nitrogen fertilizers. Chemically speaking, ammonia is produced by combining nitrogen in the air with hydrogen extracted from methane—a component of natural gas. The reaction process requires heat which is also produced by burning natural gas.

This means roughly 70 percent of the price of ammonia is dependent on the price of natural gas—which has been skyrocketing for the past two months.

Potassium, in its natural form known as potash, is mined from deep underground. The process and infrastructure required to locate and extract the mineral is extremely costly. And those costs are rising too.

Producing phosphorus is also a capital-intensive process. Its price has nearly doubled over the past year from roughly $475 per ton to $875 per ton. And its supply is about to get tighter too.

Dave Franzen, NDSU Extension soil science specialist, recently noted, “China has supplied about a third of the world’s phosphate, and it has essentially banned exports through 2022.”

No Quick or Simple Fix

In the face of these shortages and increased costs, farmers are likely to plant less “fertilizer-intensive” crops, switching from corn (a major food staple around the world) to soybeans.

Using less fertilizer in the farming process will also lead to lower harvests in the future. And a decrease in crop production threatens just about every form of food you can imagine. (Remember, beef and chicken are all fed grains too.)

The Biden administration may go on and on about “fixing” the supply chain, and the Fed can spout off about increasing interest rates to wrestle inflation under control.

But neither of them has a solution for the food problem.

The unfortunate reality is food prices are likely to keep rising for the foreseeable future. Investors looking to take advantage of this move should look to the commodities sector. Funds like the ELEMENTS Rogers International Commodity Index and the United States Commodity Index Fund should perform well.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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Bob Byrne built a reputation as a daily columnist for TheStreet.com after trading billions of dollars over two decades in financial markets. He now co-authors Streetlight Confidential investment newsletter with Tim Collins that focuses on under-the-radar companies and investment opportunities often overlooked by Wall Street. To discover how to get his proprietary research in the paid newsletter service, go to Streetlight Confidential.



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