MARKET VIEW
2 . the seismic disruption affecting the global food supply .
Globalisation is the process by which the world has become increasingly interconnected due to the rise in trade and cultural exchange . Its success relied on the growing interdependence of economies and cooperation . Improvements in technology and transportation fanned its growth with international trade as its launch pad .
However , globalisation lost its momentum in the post GFC era . The onset of the US / China trade war in 2019 accelerated the decline and other countries have ramped up protectionist rhetoric . Australia has already experienced the wrath of China . The COVID-19 pandemic only added to de-globalisation as international travel came to an abrupt and prolonged standstill and global supply chains ruptured . There is now an increasing reliance on skilled technology-savvy labour as the drive for self-sufficiency accelerates and geopolitical tensions escalate . On-shoring is now in the political arena , with the US and China leading from the front . But on-shoring by developed economies will be very expensive as higher cost domestic and regional manufacturing replaces cheaper offshore hubs . Inflationary pressures will be the result as prices reflect the increased cost of production . Many of the changes will be driven by political , rather than economic , calculus .
The chaos of the oil and natural gas markets is not the only inflationary concern , with data from the US Midwest suggesting inflationary pressures on almost every input into farming . Costs are simultaneously spiking to historic peaks and supply availability is under pressure . Higher natural gas prices directly impact ammonia and fertiliser prices . The availability of arable land is shrinking while global population continues to grow . This is increasing the importance of soil fertility , crop yield and plant maintenance or protection . Increasing food demand will only be satisfied by higher yields .
The prices of critical inputs of nitrogen , phosphorus and potassium have also moved vertically . Russia is the second largest exporter of potash followed by Belarus , and China stopped exports of phosphate in late 2021 . Ammonia and phosphate are the key inputs for fertiliser production . China is the largest producer of both .
Herbicides are a vital part of the farmer ’ s armoury , with weed control important to lift productivity . Glyphosate is the world ’ s most widely used herbicide despite health warnings . It contains both nitrogen ( ammonia ) and phosphate and prices have more than doubled . Substitute herbicide prices have coat-tailed glyphosate and shortages are widespread . Farm machinery relies on diesel to operate and the chip shortages affecting automobile production schedules have similarly hit the farm equipment industry . There has been no price relief on either front , with diesel tracking oil and other refined petroleum products and new equipment prices reflecting disruption to supply . Grain growers need to dry their produce to reduce the moisture content to prevent germination and spoilage during storage . Energy costs for drying are significant . The combination of the above issues will result in meaningful increases in the underlying cost of food production . Shortages are adding to upward pricing pressure , and they are unlikely to be fleeting .
The question that will be answered over the coming period is , will the current demand-pull inflation caused by accommodative monetary and fiscal policies and hijacked by pandemic-related supply chain issues be replaced by the cost-push variety causing a prolonged period of rising prices . Only time will tell .
Bruce McLeary
Associate Director - Research Senior Analyst ( 07 ) 3006 7219 bmcleary @ burrell . com . au
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