Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joey Isn't and I'm Tracy Alloway. Tracy, I feel
Speaker 1: like one of the things that we do is just
Speaker 1: keep revisiting old themes and sort of on this permanent rotation.
Speaker 1: And I literally think it was like, basically a year ago.
Speaker 1: I think it was exactly a year ago, we did
Speaker 1: an episode on the rising price of grains, particularly corn,
Speaker 1: wheat and soy, and since then, let's just say, we
Speaker 1: have to revisit that now. Yeah, well we were just
Speaker 1: talking about this, but I think a year ago, you know,
Speaker 1: the theme was the weather hasn't been that good, crops
Speaker 1: haven't been that good. Food prices are rising, China is
Speaker 1: buying a lot, and that's adding additional pressure on supply,
Speaker 1: and now we have to throw Russia Ukraine into the mix,
Speaker 1: and it just seems like a pretty bad situation has
Speaker 1: possibly gone a whole lot worse, right, And so when
Speaker 1: people think about the commodity effects of that of the war,
Speaker 1: of that conflict, I think predominantly people think about oil
Speaker 1: and gas, and of course we have seen upward pressure
Speaker 1: on both, but Ukraine is also a massive export of wheat. Belarus,
Speaker 1: which has also come under sanctions, is a big exporter
Speaker 1: of fertilizer. And so we have had this already tight
Speaker 1: market for commodities for grains for some of the conditions mentioned,
Speaker 1: and they've just gotten a lot tighter. Yeah. And of course,
Speaker 1: the one thing that I'm sure all lots listeners know
Speaker 1: about the commodities market by now is that everything tends
Speaker 1: to be interconnected. So if you get a rise in
Speaker 1: the price of natural gas, for instance, that can end
Speaker 1: up feeding through into the price of fertilizers. I saw
Speaker 1: one news story right before we came on saying that
Speaker 1: um Yarra, which is one of the big fertilizer producers
Speaker 1: in Norway, is curtailing its production of fertilizer because of
Speaker 1: the nat gas price surge. And then you have things
Speaker 1: that happen in the commodities market that feed through into
Speaker 1: other commodities. So again another example here, the price of
Speaker 1: wheat is expected to increase production of pork because of
Speaker 1: course a lot of pigs in Europe in particular eat
Speaker 1: wheat as their food grains. So everything is interconnected and
Speaker 1: it becomes really difficult to predict and track A lot
Speaker 1: of these movements and impacts exactly right. Well, you know,
Speaker 1: we mentioned that we talked about this year ago, and
Speaker 1: so we're going to bring back the guests we spoke
Speaker 1: to before and try to wrap our heads around what
Speaker 1: is going around now, because the one other difference is
Speaker 1: that anxiety about inflation overall much higher today than it
Speaker 1: wasn't early one, even as we started to see these
Speaker 1: prices rise. So complicated time, complicated situation. I'm very excited
Speaker 1: to bring back Scott Irwin. He's an agriculture economist at
Speaker 1: the University of Illinois. So Scott, thank you so much
Speaker 1: for coming back on odd Lots. My pleasure, really look
Speaker 1: forward to it. Absolutely great to have you back. Let's
Speaker 1: start with actually right before the invasion, just talk a
Speaker 1: little bit about how tight or how would you characterize
Speaker 1: the conditions in the grain markets. You know, sort of
Speaker 1: early February, we were kind of scraping along. Prices were
Speaker 1: certainly elevated relative to historical averages. UH. The latest thing
Speaker 1: that the markets that are preserved was a less than
Speaker 1: stellar growing season for South American soybeans. But we were
Speaker 1: getting along anticipating a pretty good spring and big plantings
Speaker 1: of UH corn and soybeans here in the United States.
Speaker 1: That would probably help smooth that out. We're going to
Speaker 1: have some volatility, may be related to summer weather here
Speaker 1: in the US, but I wouldn't say that, you know,
Speaker 1: we thought that anything was way out of bounds historically.
Speaker 1: So how big a deal is Russia invading Ukraine from
Speaker 1: a grains or agricultural perspective, because on the one hand,
Speaker 1: you hear a lot that the Ukraine in particular is
Speaker 1: you know, known as the bread basket of Europe. There's
Speaker 1: a lot of production there. But on the other hand,
Speaker 1: farming is an industry that is familiar with supply shocks.
Speaker 1: You know, things happen, there's, um, I guess, bad weather
Speaker 1: and pestilence as well. So how big a deal is this? Um?
Speaker 1: Couch it in historical terms? Sure, This is the way
Speaker 1: that I try to communicate just how big of a
Speaker 1: whole this war is blowing in the global grain markets.
Speaker 1: The Ukraine in recent years has planted about fifty nine
Speaker 1: million acres of their top six crops wheat, sunflowers, soybeans, corn, barley,
Speaker 1: and what they call rape scene. Um, So how big
Speaker 1: is that? And that's what's under threat of potentially not
Speaker 1: being planted at all, uh this spring due to the war.
Speaker 1: That's almost exactly equal to the total planted area of
Speaker 1: crops in Illinois and Iowa. So you're just blowing that right,
Speaker 1: potentially out of the global markets. Imagine that now they're
Speaker 1: they're not as productive if those acres don't grow as
Speaker 1: much as Iowa and Illinois do. But you know that
Speaker 1: right there is about four billion bushels of production that
Speaker 1: potentially if it doesn't get planted, or the vast majority
Speaker 1: doesn't get planted. Uh, you're just taking that off. Uh
Speaker 1: you know. So that's just the immediate war impact then
Speaker 1: they have. On the other side, Russia, they're not going
Speaker 1: to but have you know, any problems growing their crops
Speaker 1: this year? The question is how much of it will
Speaker 1: be available to the world markets. Russia is the world's
Speaker 1: largest exporter of wheat. And again, the way I try
Speaker 1: to put that into perspective, well, you know, with US production,
Speaker 1: what um would it take for US wheat production to
Speaker 1: replace what's lost potentially for Russia. Well, Kansas is our
Speaker 1: biggest uh winter wheat producer here in the United States,
Speaker 1: and it would take four million Kansas is to replace
Speaker 1: what was lost Wow, that's a that's quite a striking
Speaker 1: way to put it. You know, we're recording this in
Speaker 1: the middle of March. Actually recording data is out March fourteen.
Speaker 1: Where are we in the cycle? And so you talked
Speaker 1: about plantings in Ukraine right now? What needs to happen, like,
Speaker 1: are we talking about in the couple of weeks where
Speaker 1: exactly as the timing of this. In the Ukraine and Russia,
Speaker 1: their biggest wheat crop is winter wheat, which was planted
Speaker 1: last fall. It basically goes into hibernation in the winter
Speaker 1: and then it's plant and it's harvested in the early summer.
Speaker 1: That that's already growing in both countries. Uh, then the
Speaker 1: question is how much of it will be available to
Speaker 1: be harvested and moved into international markets in the Ukraine.
Speaker 1: But the really big danger is the number one crop
Speaker 1: in terms of volume in the Ukraine is actually corn,
Speaker 1: which the vast majority of it is exported uh internationally.
Speaker 1: Ukraine exports now over a billion bushels of corn every year.
Speaker 1: And the planting window in Ukraine for their spring crops
Speaker 1: it's almost the same as the United States. It's not
Speaker 1: really very much different. They will be planting in April
Speaker 1: and early May, so they're really literally just a couple
Speaker 1: of weeks from going back, or they would intend normally
Speaker 1: to go back to the fields UH in a couple
Speaker 1: of weeks. So we've seen the price of wheat shoot
Speaker 1: up really dramatically, and the price of corn has gone
Speaker 1: up to but not as much as wheat. What exactly
Speaker 1: accounts for the discrepancy there? Well, because combined the Ukraine
Speaker 1: and Russia is a significant component of the total exports
Speaker 1: of wheat in the world. UH number one, Russia's number one,
Speaker 1: and Ukraine. Off the top of my head, I think
Speaker 1: their second. When we think about we where does it go?
Speaker 1: What is the end destination of wheat look like? And
Speaker 1: Tracy mentioned something that in Europe the pigsy wheat and
Speaker 1: how much is bread, how much is pasta, how much
Speaker 1: is feed? What is the ultimate distribute and what kind
Speaker 1: of substitute ability is there between grains such that if
Speaker 1: the price of wheat sores, then the end bire can
Speaker 1: maybe switched to a cheaper commodity for feeding animals, for
Speaker 1: livestock feeding, there's a great deal of substitution. Basically, there's
Speaker 1: the potential for a substitution if you have those supplies.
Speaker 1: Where there's real concerns is you know, the vast bulk
Speaker 1: of wheat is actually used for human consumption, bread, pasta, crackers,
Speaker 1: things like that. This is potentially huge problems for lower
Speaker 1: to middle income countries in North Africa and throughout the
Speaker 1: Middle East that have relied very heavily on the imports
Speaker 1: of wheat from this area and that's almost all for
Speaker 1: human consumption. Egypt is kind of the prime example. You know,
Speaker 1: Joe mentioned the substitution effect, the idea of people, you know,
Speaker 1: maybe instead of we you use something else to feed
Speaker 1: your pigs. But could you walk us through exactly what
Speaker 1: happens when you get a price shock like this, Like
Speaker 1: how does it filter through the broader market? So prices increase,
Speaker 1: and then do pig farmers immediately start deciding to feed
Speaker 1: their herds something else? Do farmers respond to the price
Speaker 1: increase immediately by altering their planned crops? Like what exactly
Speaker 1: is the sequence of events that happens. Well, all of
Speaker 1: this is really going on at the same time, and
Speaker 1: this is one of the reasons why in this kind
Speaker 1: of circumstance you see just such incredible volatility or spiking
Speaker 1: of prices in week because of the nature what I
Speaker 1: would say is the natural inflexibility built into the consumptions
Speaker 1: side of commodities like wheat, corn, and soybeans in a
Speaker 1: very very short run. On the animal side, yes, there's
Speaker 1: some short run a substitution in terms of feeding, but
Speaker 1: that takes some time and you know, the animals that
Speaker 1: are there have to be fed something. So this is
Speaker 1: the heart and soul of the source of what economists
Speaker 1: called the short run in elasticity of demand for agricultural commodities.
Speaker 1: So on the animal side, the animals have to be fed,
Speaker 1: and there's limited substantutability. You know, you have to get
Speaker 1: different suppliers, commodities have to be moved around in terms
Speaker 1: of this substitution. It will happen, but it just takes time.
Speaker 1: And then that's even harder on the human side, when
Speaker 1: as we know, diets are relatively fixed, and you know,
Speaker 1: countries like Egypt will do everything they can to probably
Speaker 1: try to increase subsidies and insulate their population from these
Speaker 1: price increases. But if wheat is simply not available in
Speaker 1: a place like that, that's a huge problem. There's there's
Speaker 1: really besides aid from other countries Uh, it's very difficult
Speaker 1: to change that diet in a matter of a few weeks. Okay,
Speaker 1: so you walk through, we get this price surge, what
Speaker 1: happens on the consumption side, what happens on the supply side?
Speaker 1: What are a is there's still time for farmers in
Speaker 1: the US or anywhere else to change their choice of
Speaker 1: crops or to reallocate acreage. And is there anything anyone,
Speaker 1: whether in the US or elsewhere, can do to increase
Speaker 1: supply overall in a short to medium period of time.
Speaker 1: What is the opportunity to replace the lost the lost?
Speaker 1: Weeat A great question. Uh. In wheat unfortunately kind of
Speaker 1: in a devilishly tight situation here because the biggest wheat
Speaker 1: crop in the world, as I mentioned before, is winter wheat,
Speaker 1: and for the Northern hemisphere that was already planted and
Speaker 1: there's just nothing you can do now in terms of
Speaker 1: increasing the winter wheats supply in the northern hemisphere of
Speaker 1: the world because that planting window was last fall. Now,
Speaker 1: the southern hemisphere can uh, you know, begin planting winter
Speaker 1: wheat right now. Uh. And there are some large producers
Speaker 1: like Australia, but the Southern hemisphere doesn't tend to be
Speaker 1: you know, that large of a wheat producer, so maybe
Speaker 1: we'll get some more out of that, but you know
Speaker 1: that's you know, six eight months down the line. So
Speaker 1: the short run on the wheat supply is all going
Speaker 1: to be with spring wheat um and there is some
Speaker 1: scope for the ability to expand production of spring wheat,
Speaker 1: but springwheat tends to be grown in far northern areas
Speaker 1: of the Great Plains of the US and into Canada,
Speaker 1: and uh so there'll be probably some increased production there,
Speaker 1: but it can't show up until at the earliest September.
Speaker 1: So you know, that's the vice that the wheat market
Speaker 1: is in in the world, is that our ability to
Speaker 1: basically really alter availability is through the channel of spring wheat,
Speaker 1: which is a relatively minor crop compared to the major crop,
Speaker 1: of which are wheat, So that makes it hard. You
Speaker 1: mentioned Russian winter wheat at the beginning, and of course
Speaker 1: you know that's expected to still grow and probably be
Speaker 1: largely unimpacted by the events in Ukraine, but no one
Speaker 1: can get to it, or fewer people can get to
Speaker 1: it because of the sanctions in place. What are the
Speaker 1: chances that some of that is able to leak into
Speaker 1: the market. Well, that's going to be the great question
Speaker 1: because we know, first off, there's what economists called trade
Speaker 1: diversion in these kinds of situations. Um, you know, not
Speaker 1: everyone is going to follow the sanctions. For example, we
Speaker 1: expect that um, some of Russia's wheat exports will now
Speaker 1: go to China so that they can use that to
Speaker 1: feed their feed their animals and contribute to their diets.
Speaker 1: So that's trade diversion will happen. The big question in
Speaker 1: my mind is always leakage that you know, um, not
Speaker 1: speaking to the morality of the situation, but we know
Speaker 1: that historically that large international commodity trading firms are experts
Speaker 1: at figuring ways uh semi legally is the way I
Speaker 1: would put it around the sanctions and to move these
Speaker 1: commodities around the world. Yet there's a cost of that.
Speaker 1: You know that they'll only buy the wheat from Russia
Speaker 1: deep discounts. It takes time for these alternative channels and
Speaker 1: legalities to be worked out, and so inevitably, you know,
Speaker 1: trade diversion and leakage can't offset the full effect of
Speaker 1: the sanctions. And what you know, we're all trying to
Speaker 1: figure out, and that's what the market has to assess
Speaker 1: in real times. You know, well, what's that leakage and
Speaker 1: a trade diversion going to look like. So we mentioned
Speaker 1: it at the very beginning in the intro. But when
Speaker 1: we had you on a year ago, I think it
Speaker 1: was about a year ago, the story at the time
Speaker 1: seemed to be about very aggressive Chinese buying and building
Speaker 1: up stocks, building a buffer stocks, and I think I
Speaker 1: saw ustand recently I forget the number. I'm not sure
Speaker 1: how many years worth of week trying to current he has.
Speaker 1: Wait since you mentioned that China is likely to be
Speaker 1: a destination for whatever wheat gets out of that market,
Speaker 1: out of the Russian market, what is the state of
Speaker 1: Chinese buying? Is it still in accumulation mode? Has it
Speaker 1: balanced out the stocks? What kind of deficit or position
Speaker 1: is China in right now? I have to admit that
Speaker 1: we're all looking through the glass darkly in terms of
Speaker 1: China's grain reserves, and that's an official state secret, and
Speaker 1: so everybody just guesses at it. Uh So, my perception
Speaker 1: is that they have done quite a bit of reserve rebuilding,
Speaker 1: but at the same time they're in the phase of
Speaker 1: rapidly rebuilding their animal herds and so in that race
Speaker 1: between increasing consumption from their animal herds versus their rebuilding. Uh,
Speaker 1: nobody really knows, but I do know that they've been
Speaker 1: back in the grain market for US supplies in a
Speaker 1: big way in the last couple of weeks, which everybody's expecting.
Speaker 1: Of what we have seen for two before the Ukrainian
Speaker 1: crisis was that China soybean buying was back to basically
Speaker 1: the trend they were on before our trade war, which
Speaker 1: means it's huge. Uh. They weren't buying as much corn
Speaker 1: in two as they did in UM. It had backed
Speaker 1: off some. Uh that I suspect that they'll be back
Speaker 1: closer now in two now than they had planned because
Speaker 1: the lack of availability of Ukrainian supplies. But that story
Speaker 1: remains to be written. This might be a very basic shan.
Speaker 1: But if supply is constrained, and you know, everyone in
Speaker 1: the world presumably wants to keep wheat prices relatively low
Speaker 1: so that the price of bread doesn't go up too much,
Speaker 1: China is still buying um large amounts. How does existing
Speaker 1: supply get allocated? Could we see a return or even
Speaker 1: more sort of food supply nationalism and the idea that
Speaker 1: people are going to be keeping more of their own
Speaker 1: crops closer to home. This is the great danger in
Speaker 1: global grain markets right now, Tracy. This is what I'm
Speaker 1: most concerned about, which history shows that when you get
Speaker 1: in these huge scary price spikes, particularly for food commodity
Speaker 1: like wheat, that there's a tendency for a bit of
Speaker 1: panic to set in and countries begin shutting off exports
Speaker 1: to uh basically protect domestic supplies and protect domestic consumers,
Speaker 1: and that really leaves importers, particularly importers in the not
Speaker 1: rich countries, out in the cold. And we're already seeing
Speaker 1: that kind of bing bing bing beginning to happen. And
Speaker 1: so if you lock up supplies in some doesn't take
Speaker 1: very many exporting countries, then that really makes prices for
Speaker 1: everybody else explode and puts more of the burden on
Speaker 1: generally poorer importing countries. And that's where things politically get
Speaker 1: really explosive. And so that's that's a real concern that
Speaker 1: I have, because the market is going to do its job.
Speaker 1: The market's job is basically to the price of wheat
Speaker 1: up high enough that you ration current demands enough so
Speaker 1: that the globe has something left over at the end
Speaker 1: of the year the problem, you know, But in order
Speaker 1: for the market to do that job, somebody has to
Speaker 1: get priced out of the global market. And the job
Speaker 1: of trade is for the market to then spread around
Speaker 1: available supplies to um to the highest bidder. And some
Speaker 1: people that as a policy matter, that we probably don't
Speaker 1: want priced out of the market can easily get priced
Speaker 1: out of the market as the market does its job.
Speaker 1: So that's what happens in the very short run. And
Speaker 1: the other side of the market's job is to run
Speaker 1: the price up of wheat high enough that as we
Speaker 1: can expand acreage and production to adjust to this that
Speaker 1: supply response, and it will happen. It always does, but
Speaker 1: it's you know, can take a year or two for
Speaker 1: this kind of shock to fully be absorbed and we
Speaker 1: get the supply response in terms of expanded a creach
Speaker 1: and production around the world. So the shocks from this
Speaker 1: are going to reverberate for some time. Yeah, there's so
Speaker 1: many follow up questions I have to that, you know,
Speaker 1: But the first one when price of oil and also gas.
Speaker 1: But when the praise of oil surges, it immediately becomes
Speaker 1: a political question and people start turning to elected leaders,
Speaker 1: what are you going to do about this? What can
Speaker 1: we do to say, increase exploration or drilling in the
Speaker 1: United States, or what can Germany do to cut off
Speaker 1: its reliance from Russian gas, etcetera. Are there policy levers
Speaker 1: that countries, whether rich or poor, can pull here? But
Speaker 1: I'm thinking in the United States, for example, is there
Speaker 1: something equivalent is this? Is there something for the U
Speaker 1: s d A Or the House to think about doing
Speaker 1: during such a time of high prices and tight supplies. Well,
Speaker 1: there is one that could be considered. In the United States.
Speaker 1: We have something that's called the Conservation Reserve program in
Speaker 1: the United States that currently contains twenty two million acres
Speaker 1: of previously cropped land that has been taken out of
Speaker 1: production presumably because it's most environmentally sensitive in terms of
Speaker 1: wind and water erosion, or it has bio diversity. Really
Speaker 1: a lot of it's for pheasant hunting. Uh, So there's
Speaker 1: that acreage that could be considered for maybe a special
Speaker 1: one time exemption from the current long term contracts that
Speaker 1: are required to place acreage into that reserve. So we
Speaker 1: have an acreage reserved something like the search Egic Petroleum
Speaker 1: Reserve that it's at least could be considered. UH. It's
Speaker 1: very controversial, as I found out when I suggested it
Speaker 1: a couple of weeks ago, But basically my argument is
Speaker 1: pretty straightforward, and you can hear it through the conversation
Speaker 1: with Pad today. I believe this is the largest supply
Speaker 1: shock of my lifetime UH in global grain markets. UH
Speaker 1: if the conflict continues and severely harms planting in the Ukraine,
Speaker 1: and so we need to at least look at extraordinary
Speaker 1: measures like this here in the US that you use.
Speaker 1: Ahead of us, they're already apparently making plans to make
Speaker 1: their what they call set aside acreage available for production
Speaker 1: this year. And those policy means you might think, oh
Speaker 1: my gosh, you well you can plant this spring, but
Speaker 1: we don't get that until next fall. But the markets
Speaker 1: will react to those move now, because the markets always
Speaker 1: are in an anticipatory mode, and if they see that
Speaker 1: there's going to be somewhat more supply than they would
Speaker 1: normally think, that will have an impact now. And so
Speaker 1: that's UH. In the EU and in here in the US,
Speaker 1: those those are pretty much the only policy levers that
Speaker 1: we have. No one has huge grain stocks piling up
Speaker 1: in warehouses anymore like we used to say in the
Speaker 1: nineteen eighties. Nobody has those, So the only thing we
Speaker 1: really can do is try to juice up acreage this spring. Wait,
Speaker 1: could you walk us through exactly why this is so controversial,
Speaker 1: because I did see some people on Twitter who were
Speaker 1: pushing back. And you know, initially, if someone says, well,
Speaker 1: the price of wheat is going up a lot, there
Speaker 1: might be food shortages. Let's increase acreage. It sounds like
Speaker 1: a very like good thing to do. But I imagine
Speaker 1: there are those environmental concerns and other issues with it.
Speaker 1: So what are those exactly? Well, there's what I would
Speaker 1: call a you know, they're the environmental concerns, and then
Speaker 1: they're the practical pushback on that idea. The environmental is
Speaker 1: these are supposed to be highly erodable acres and less
Speaker 1: productive acres that are put into the conservation reserve. And
Speaker 1: there's no doubt that that is true, and so you're
Speaker 1: not getting your your prime acres motors, productive acres put in.
Speaker 1: And so if you took them out, people say it
Speaker 1: wouldn't be that productive. My counter that that is the U.
Speaker 1: S d A has actually done some great work tracking
Speaker 1: parcel by parcel. What happens to acres in the past
Speaker 1: as they've come out of the conservation reserve, because it
Speaker 1: turns over there's acres going in every year, there's acres
Speaker 1: coming out. Without getting into all the details, but over
Speaker 1: time the acres that come out over go back into
Speaker 1: crop production or some kind of annual crops, so it
Speaker 1: can be used. So that's the one biggest is you know,
Speaker 1: these are supposedly our most environmentally sensitive acres, so why
Speaker 1: would we want to um mess with them? And then
Speaker 1: the other point is you know that those acres have
Speaker 1: biodiversity benefits in particular, as I said, for recreation and
Speaker 1: animal biodiversity, and so those benefits are there. And in
Speaker 1: my mind, probably the bigger concern is the practical It's
Speaker 1: very very late in the calendar to for farmers to
Speaker 1: adjust their plans to try to farm those acres. Um.
Speaker 1: You know, if even if you do try to farm
Speaker 1: the CRP acres, you have to plow up something that
Speaker 1: is in grass, can you get the seed and fertilizer
Speaker 1: that you need even if you want to do this.
Speaker 1: So so there are some very significant practical concerns to
Speaker 1: doing this. But I'm a big believer as an economist,
Speaker 1: I mean, if there were ever incentives in place to
Speaker 1: do what uh. One of my old professors at Purdue,
Speaker 1: Earl Butts, was famous for saying when he was Secretary
Speaker 1: of egg in the seventies and the Nixon administration, he
Speaker 1: was famous for when that price pike went so high
Speaker 1: that farmers would plant fence road defense row. And the
Speaker 1: incentives are in place, uh to go fence row to
Speaker 1: fence row, and um, you know, and the other is
Speaker 1: a policy consideration. You know, there will be differences of
Speaker 1: opinions about this, but these are extraordinary conditions. And I think,
Speaker 1: going towards what you said, Tracy, maybe we should consider
Speaker 1: doing what we can, even if it's not our most
Speaker 1: productive acres. Maybe if it won't make a huge difference,
Speaker 1: but why not do what we can to address these
Speaker 1: supply issues, even if they're not going to make a
Speaker 1: huge difference. But you know, even a few hundred million
Speaker 1: extra bushels of wheat in this country could go along ways,
Speaker 1: uh to spanning the gap in places like Egypt potentially
Speaker 1: as we go through the next year. So that that's
Speaker 1: my counter argument to those that criticize that idea. That
Speaker 1: was great and uh, that was very interesting answer. I
Speaker 1: want to continue on the supply side aspect of the
Speaker 1: question because you mentioned okay, is the fertilizer going to
Speaker 1: be there? And again it is something I think about,
Speaker 1: let's say oil, which is that even if there were
Speaker 1: some sort of you know, impulse to explore more oil,
Speaker 1: there's a lot of tightness in labor markets. At the
Speaker 1: oil padge. People talk about the shortage of steel pipes,
Speaker 1: in the shortage of fracts, and what are you know,
Speaker 1: even prior to this crisis, how have shortages in general
Speaker 1: and tight labor markets, how are they affecting the farmers
Speaker 1: that you speak to in the grain area. And what
Speaker 1: kind of scarcity of other commodities in labor make the
Speaker 1: supply side perhaps less rapid or how much of a
Speaker 1: challenge would that be to scaling up more production. Excellent question.
Speaker 1: Farmers have been struggling on the labor side like everyone else,
Speaker 1: but I haven't really heard that that would be a
Speaker 1: significant constraint, you know, Uh, farmers being farmers, they'll just
Speaker 1: work extra hours to get it if they have to.
Speaker 1: The bigger concern is the availability of fertilizer and her
Speaker 1: besides and pesticides that they need. I think farmers were
Speaker 1: counting on all that working before the Ukraine crisis, and
Speaker 1: I think that was a reasonable position for the US
Speaker 1: because we don't actually import that large of a proportion
Speaker 1: of our fertilizer probably so, so I think that what
Speaker 1: we needed was probably in place in the United States,
Speaker 1: but it was a little iffy. But right now, UM,
Speaker 1: when I talk to farmers, they're very nervous about just
Speaker 1: getting their uh, chemical chemicals and fertilizer supplies. Now no
Speaker 1: one seems to be giving them firm answers on anything.
Speaker 1: So that's that is what I'm hearing. I think the
Speaker 1: supplies are there, but everything is just in such turmoil
Speaker 1: that uh. That's if there's a place for a bottleneck,
Speaker 1: that is where it's going to show up this spring. Uh.
Speaker 1: I believe that for the planned acreage that we had
Speaker 1: before the Ukrainian crisis, that the vast majority of the
Speaker 1: supplies are there and they will eventually get through. But
Speaker 1: it makes one a little, I think, a little sketchy
Speaker 1: how much we can expand beyond that even with these
Speaker 1: great prices. From what I'm hearing from farmers, what is
Speaker 1: the situation with fertilizers at the moment, because you know,
Speaker 1: as you mentioned, it seems like it's difficult to get
Speaker 1: information on supply potentially, But we have seen some impact
Speaker 1: in the market already, and even before Russia actually invaded Ukraine,
Speaker 1: there's a lot of talk of tightness in that market.
Speaker 1: Oh clearly. I mean we saw starting last fall that
Speaker 1: nitrogen fertilizer prices just spiked, uh to um, you know,
Speaker 1: extraordinary price levels, you know, more than double and and
Speaker 1: some of that is just demand side and natural gas
Speaker 1: prices or spiking, which is the primary input for making
Speaker 1: nitrogen fertilizer. So you know, we were already struggling with
Speaker 1: extremely large increases in production costs, particularly for corn here
Speaker 1: in the United States. Uh So that was already a
Speaker 1: major topic of conversation here in the in the corn belt.
Speaker 1: It seems like there's two, at least a couple of
Speaker 1: factors on the fertilizer side. There is the high cost
Speaker 1: of energy, and I think Tracy mentioned in the beginning
Speaker 1: that we saw some fertilizer companies in Europe just say
Speaker 1: we're not going to produce right now because it's not
Speaker 1: economical given the high cost of natural gas and then
Speaker 1: my understanding is that Belarus itself is a huge exporter
Speaker 1: of either fertilizer or one of the key ingredients to fertilizer.
Speaker 1: Maybe can you talk a little bit more about the
Speaker 1: sources of constraints and particularly the Belarus angle. Well, right, um,
Speaker 1: you know, Russia through Belarus is you know, they're a
Speaker 1: huge at exporter of potash uh. You know, one of
Speaker 1: those things that we never talked about. You know, again,
Speaker 1: for the United States, that's probably not a huge uh issue,
Speaker 1: even though if we would could lose ten or fifteen
Speaker 1: percent of your supplies, you know, that has an impact.
Speaker 1: But that's potentially next year a major issue for a
Speaker 1: country like Brazil, which imports most of its fertilizer, and
Speaker 1: so that's you know, the difference. I do not know
Speaker 1: the import percentages for for Europe, but I suspect they're
Speaker 1: also very tightly tied to the Russian and Belarusian supplies,
Speaker 1: you know, and you know, and one of the things
Speaker 1: that I find terribly interesting little factoid about how this
Speaker 1: stuff filters in one of the Formula one Grand Prix
Speaker 1: UH teams is actually or was sponsored by one of
Speaker 1: the largest Russian fertilizer companies and his son was a
Speaker 1: driver on a Formula One team, and last week it
Speaker 1: was announced that Formula One kicked him out. Oh I
Speaker 1: think I saw that headline. I didn't. I didn't make
Speaker 1: the connection of what was going on there. Yeah, they're
Speaker 1: they're one of those companies and they were sponsoring a
Speaker 1: Formula One team, the host team and uh, you know
Speaker 1: they've canceled the Russian Grand Prix uh and kick the
Speaker 1: UH fertilizer sponsor from Russia out of out of the program.
Speaker 1: I mean, it doesn't have much to do with this,
Speaker 1: but it just showing how extraordinary and how fast moving
Speaker 1: these events are. Right now, I want to go back
Speaker 1: to things that can be done about the situation. And
Speaker 1: another thing that I've seen floated recently is this idea
Speaker 1: of maybe suspending incentives for renewable fuel production. So that
Speaker 1: would mean, you know, less corn being used for stuff
Speaker 1: like ethanol and more of it going into actual food production.
Speaker 1: How feasible is that politically and practically? U super question
Speaker 1: and something that you know I've been talking about in
Speaker 1: the last week. UM, It's a little bit complicated, so
Speaker 1: I'll try to be really condensed in my answer. Short
Speaker 1: answer is that waving the ethanol mandates here in the
Speaker 1: United States I don't believe would have hardly any impact
Speaker 1: on the use of ethanol um in the United States,
Speaker 1: which means that wouldn't have any savings in terms of
Speaker 1: corn bushels. And the reason is that ethanol has now
Speaker 1: become the cheapest source of octane available to gasoline blenders,
Speaker 1: and so without intending it to be, we ran an
Speaker 1: experiment about waiving the mandates and what would happen to
Speaker 1: ethanol use in the Trump administration through something called small
Speaker 1: refinery exemptions, and that was effectively waiving the mandate, and
Speaker 1: we didn't use any less ethanol. In fact, it grew
Speaker 1: a little bit as we waived the ethanol mandates. So
Speaker 1: I think that that's that would have no impact on
Speaker 1: corn usage. So the ethanol side of the equation in
Speaker 1: terms of our bio fused policy to me as a nonstarter.
Speaker 1: It doesn't get us anywhere, and and it would have
Speaker 1: the follow on effect of likely raising the price of
Speaker 1: gasoline a little bit at least and maybe noticeably. So
Speaker 1: I call that a robbing Peter to pay Paul uh
Speaker 1: policy response that doesn't really get us anywhere where. It's
Speaker 1: more interesting those ideas, and and doesn't get discussed enough
Speaker 1: is on the advanced or biodiesel renewable diesel side. We
Speaker 1: are currently going through a boom in world veg oil
Speaker 1: prices through a boom and building what are called renewable
Speaker 1: diesel UH plants. Long story, but even there, if we
Speaker 1: waived those parts of our RFS mandates, it's not very
Speaker 1: clear if it would have much impact because the largest
Speaker 1: policy subsidy for renewable diesel is not coming through the
Speaker 1: UM the RFS, our national policy. It's coming through the
Speaker 1: local Urban Fuel standard in California. So to have really
Speaker 1: any guarantees you want to take pressure off of world
Speaker 1: veg oil markets, you have to waive the California Low
Speaker 1: Carbon Standard and the RFS at the same time. That
Speaker 1: doesn't seem likely to happen, particularly the California. And can
Speaker 1: you talk a little bit about the effect of the
Speaker 1: end consumer and so, you know, people don't eat wheat.
Speaker 1: Typically they eat bread or the pasta. And I'm seeing
Speaker 1: some claims that you know, in the end like the
Speaker 1: actual wheat hasn't got a huge source of the UH
Speaker 1: cost of a loaf of bread or whatever it is,
Speaker 1: how much do these huge swings feed through to the
Speaker 1: price of finished goods that consume wet Again critical point
Speaker 1: to understand. Um uh. Here in the United States, on average,
Speaker 1: the cost of what a consumer bias in the grocery
Speaker 1: store for food, only about fifteen per cent is represented
Speaker 1: by the cost of the raw commodity. So if you
Speaker 1: take a dollar food expenditure, fifteen cents is the raw commodity.
Speaker 1: Even if that doubles, you know, you go from fifteen
Speaker 1: to thirty cents, that's fifteen cents on a dollar. You know,
Speaker 1: it's noticeable, but it's not doubling because you have that
Speaker 1: passed through effect. Um. You know, in terms of the
Speaker 1: retail food price inflation, the number one factors are one,
Speaker 1: price of fuel basically crude oil because uh, it's like
Speaker 1: we have to move all this food around from producers
Speaker 1: to consumers. And then number two wages because of all
Speaker 1: the processing that goes on. So those are the biggest
Speaker 1: determinants of retail food price inflation. Although you are certainly
Speaker 1: gonna gonna be added cost push inflation from these raw
Speaker 1: commodity price increases as well. But here in the US,
Speaker 1: you're not going to see you know, fifty percent food
Speaker 1: price inflation because the price of reed's gone for that reason.
Speaker 1: But that's not true in countries like Egypt, where those
Speaker 1: those pass throughs are much closer to one for one.
Speaker 1: I have one last question, just based on that. Finally,
Speaker 1: like on this policy question, should rich countries think about
Speaker 1: aid too poor? I mean that seems to be the
Speaker 1: recurring theme that we keep coming back to. Is okay
Speaker 1: US reasonably insulated. Yes, prices will rise, but obviously, as
Speaker 1: you just mentioned, there isn't anything close to a one
Speaker 1: to one passed through. We're probably not going to have
Speaker 1: outright shortages in the US. But for poorer countries Egypt
Speaker 1: and elsewhere, food rise in food price is gonna have seriously,
Speaker 1: obviously devastating health consequences, devastating political cuntic quinces, consequences for
Speaker 1: stability overall, From a policy perspective, should leaders in rich
Speaker 1: countries be thinking about that, about what can be done
Speaker 1: with our own wealth, with our own stocks, to ameliorate
Speaker 1: some of the negative effects on the countries that can't
Speaker 1: easily afford these price wings. Absolutely, and the number one
Speaker 1: policy lever that should be pulled there is to the
Speaker 1: degree possible to persuade exporting countries not to hoard their
Speaker 1: supplies exactly when they're most needed on world grain markets.
Speaker 1: That's number one. To try to stop that kind of
Speaker 1: beggar thy neighbor dominoes falling, that's number one. Number two,
Speaker 1: if there are ways to increase food aid where we can,
Speaker 1: that's important. And number three the this is a longer
Speaker 1: term response, but we've we know that the best way
Speaker 1: is to continue supporting the growth of agriculture in these
Speaker 1: poorer areas. That's the number one way for their economies
Speaker 1: to develop and to um become more self sustaining in
Speaker 1: some of these key commodities areas. So support for their
Speaker 1: domestic agricultural producers it's really important. For example, you know,
Speaker 1: you've got to be really careful. We've learned Joe that Okay, yeah,
Speaker 1: we have this emotional response and we want to really
Speaker 1: help poorer countries and so we kind of dump food
Speaker 1: aid in there. In the short run, well, that just
Speaker 1: destroys the livelihood of farmers in those countries. So it's
Speaker 1: it's it's not as easy as just give them a
Speaker 1: lot more aid. Well, Scott Irwin always fascinating to catch
Speaker 1: up with you, and like I said, said in the beginning,
Speaker 1: it seems like infinitely more complex than the first time
Speaker 1: we chatted. But thank you so much for coming back
Speaker 1: on Odd Lots. Yeah. I really always enjoy it and
Speaker 1: hopefully added a little signal and not too much noise
Speaker 1: to the conversation. Absolutely, that was very useful and I
Speaker 1: learned a lot from it, So thank you. Yeah, that
Speaker 1: was great, Scott. Thank you, Tracy. I always really like
Speaker 1: speaking with Scott. It does feel like something like a
Speaker 1: wheat shortage here. We might look at a screen and
Speaker 1: see arise and prices, but and this is a theme
Speaker 1: that comes elsewhere. There's sort of a very there's a
Speaker 1: difference between arise and prices and then places just not
Speaker 1: being able to get the actual commodity. Yeah. Absolutely, And
Speaker 1: I think this is something that we actually wrote about
Speaker 1: for the Odd Lots newsletter recently, this idea of the
Speaker 1: difference between the financial realm and the physical realm, which
Speaker 1: is something that it feels like the world is very
Speaker 1: much way king up to at the moment. But I
Speaker 1: also like Scott's nuance on the point of wheat prices
Speaker 1: in the US and the idea that well, if the
Speaker 1: raw material goes up a lot that shouldn't necessarily translate
Speaker 1: into higher prices for things like bread and pasta, because
Speaker 1: a lot of those are going to be driven by
Speaker 1: larger input costs like labor and energy. Unfortunately, at the moment,
Speaker 1: energy prices and perhaps labor as well are also going up, right,
Speaker 1: So it's not exactly much constellation necessarily that the price
Speaker 1: of bread isn't entirely determined by wheat, is just determined
Speaker 1: by everything else in the price of all those things are.
Speaker 1: You know, it's interesting. Another theme that continues to emerge
Speaker 1: is how bifurcated or how fragmented a lot of these
Speaker 1: markets are. And so, you know, a scout mentioned in
Speaker 1: the US, we might be in decent shape from a
Speaker 1: fertilizer perspective, It might be tight, it might be a
Speaker 1: little bit more expensive, whereas for a country like Brazil,
Speaker 1: which he noted is extremely reliant on imported potash UH,
Speaker 1: that could be a totally different story. Of course, it
Speaker 1: would all come back around and connect and then you'd
Speaker 1: have global prices. But it is interesting to think about,
Speaker 1: you know, the US relatively insulated on a number of
Speaker 1: these things compared to UH, compared to lots of other countries,
Speaker 1: whether they be producers or consumers of great well. Also
Speaker 1: the point about certain countries that rely a lot on
Speaker 1: food imports um now being most vulnerable to all of us.
Speaker 1: And I know Egypt is the one that was mentioned
Speaker 1: a number of times, but of course there are others,
Speaker 1: and when it comes to food price inflation, this is
Speaker 1: something we've discussed again. But that is clearly a really
Speaker 1: sensitive topic for for consumers and people who have to eat,
Speaker 1: and it's the kind of thing that tends to um
Speaker 1: explode into the political sphere very quickly as well. So
Speaker 1: I think I'm very briefly mentioned the the egypt bread riots.
Speaker 1: I think that was back in two thousand and eight.
Speaker 1: I mean some people talk about those as a sort
Speaker 1: of prelude for the Arab spring entirely. So it's very
Speaker 1: easy to see food price pressures translate into political upheaval
Speaker 1: as well. Last point though, it'll be interesting if the
Speaker 1: White House does anything on those uh millions of acres
Speaker 1: that are currently held back. I didn't realize that previously
Speaker 1: that we have this equivalent of essentially, it's not quite
Speaker 1: a strategic patrol. It's not quite the equivalent of a
Speaker 1: strategic patrollingm reserve because there's nothing to sell into the
Speaker 1: market immediately, but to make them make those acres available
Speaker 1: for planting. I don't know. It doesn't feel like wheat politics,
Speaker 1: uh create havoc for the White House the same way
Speaker 1: gasoline prices do. But it will be interesting to see
Speaker 1: if that lever or something similar is pulled at some point. Well.
Speaker 1: Also Scott's point about you know, even if you just
Speaker 1: did something relatively small, and it's probably not feasible that
Speaker 1: releasing those reserved acres would suddenly lead to a big
Speaker 1: boom and supply, but even something small can send a
Speaker 1: price signal to the market and start bringing them down,
Speaker 1: particularly at a time when people, when countries are hoarding.
Speaker 1: And so if there's a lot of access buying because
Speaker 1: everyone is nervous and you're signaling to the market, okay,
Speaker 1: supply is going to come in September or whenever that comes.
Speaker 1: That might ease some of the current hoarding now and
Speaker 1: be able to have have a response even before the
Speaker 1: weed is actually or whatever grain it is is actually grown. Yeah,
Speaker 1: it's an interesting one. Although maybe the pheasant hunters will
Speaker 1: get upset. I don't know how how large is like
Speaker 1: the pheasant hunting lobby. It'll be really bad if we
Speaker 1: have to like, like we're not going to do a
Speaker 1: pheasant huntings. I mean, what if it gets to that
Speaker 1: point we're like, well now we have to do a
Speaker 1: pheasant hunting story. But we all know it's really bad
Speaker 1: if that's where we have to keep keep keep going
Speaker 1: down that route. Yeah, so we leave it. Let's leave
Speaker 1: it there. Okay. This has been another episode of the
Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You
Speaker 1: can follow me on Twitter at the Stalwart. Follow our
Speaker 1: guest Scott Irwin on Twitter. He's at Scott Irwin UI.
Speaker 1: Big thanks to our producers Magnus Hendrickson and Colin Tipton.
Speaker 1: Follow the Bloomberg had a podcast Francesca Leaving at Francesci
Speaker 1: Today and check out all of our podcasts Bloomberg under
Speaker 1: the handle at Podcasts. Thanks for listening.