In last week’s note I wrote about the 14x increase in the global price for LNG.

I also showed you the chart below.

Essentially, LNG (natural gas in liquid form for transport) has been the most inflationary of all the key bulk commodities with a 14x price increase in less than 2 years.

The effects of this rapid price increase have included higher heating, cooling and general energy prices.

But those are only first derivative effects.

The second and third derivative effects also include a significant increase in the cost to manufacture fertiliser and the price of food.

Fertiliser and food

Ammonia is the building block to manufacture nitrogenous fertilisers.

Once you have ammonia you can manufacture ammonium nitrate fertiliser. And you can also introduce carbon dioxide and convert it into urea, another commonly used fertiliser and feedstock for animal feed.

The key point is that the vast majority of ammonia is produced from pipeline natural gas or shipped and cracked LNG, with gas in these forms being the largest input cost to produce ammonia.

It therefore makes sense that the cost to manufacture these fertilisers has been going up with gas prices.

The relationship is charted below.

Note that I’ve used U.S. based fertilisers and the U.S. Producer Price Index. I’ve set a benchmark of 100 as of March 2020 because that’s when the world stopped for COVID.

That’s a pretty serious 2.5x increase in the intermediate index for nitrogenous fertilisers - with most of that growth occurring over a very short 13 months.

And we can see the directional correlation between it and the US natural gas price index which has risen at a faster clip, i.e., ~3.6x as of November 2021 before the real shortages kicked in.

While FRED data has not yet been published for 2022, you can safely assume U.S. LNG prices are still going up to the right and this will continue for some time.

The rising cost of food has a great Dickens to do with expensive gas!

Combining all of the above means that the cost to grow agricultural commodities that require nitrogenous based fertilisers has followed the price of gas up. It’s been a rapid rise since December 2020.

Ultimately, this cost is passed onto the consumer in the form of higher food prices.

And if energy and food prices continue to go up due to underinvestment in fossil fuels, a lack of renewables capacity, and a reliance on geo-politically and COVID challenged supply chains, etc., something else will need to ‘give’ to counteract consumer food price inflation.

But what will it be?

Unfortunately, there is a political war raging between higher interest rates to cool demand for goods and financial assets (i.e., a reverse wealth effect) and lower interest rates to sustain a non-recessionary world that will take many years to transition from fossil fuel to something else, and repay debt.

But neither will help supply side price increases which are mainly responsible for the high price of gas, fertilisers and other intermediate inputs.

Meanwhile, high gas prices will lead to higher fertiliser prices and more expensive meals.

That of course assumes you can get one, because for billions of people a daily meal is not a given.

Mike