Food Inflation May Stick Around - InvestingChannel

Food Inflation May Stick Around

Proprietary Data Insights

Financial Pros Top Ag. Input Stock Searches This Month

#1Scotts Miracle-Gro Company83
#3CF Industries38
#4Nutrien Ltd33
#5Marrone Bio Innov.17
#6Intrepid Potash16
#7Bioceres Crop Solutions Corp.8
#8FMC Corp6
#9CVR Partners LP3

Chemically Made

In our main story below, we discuss various inflation pressures hitting farmers, especially chemicals including fertilizers and herbicides.

We pointed to companies benefiting from the boom including (MOS), CF Industries (CF), and Intrepid Potash (IPI).

Yet, it’s not just a matter of supply and demand driving up the price of finished chemical products.

To make fertilizer and other chemicals, production facilities use huge amounts of energy. 

For example, natural gas is a primary building block for most nitrogen fertilizers, taking 33 million metric British thermal units (MMBtu) per material ton of ammonia to make the conversion.

Put simply, natural gas accounts for 70%-90% of the variable production costs.

However, companies like Intrepid Potash, which provide the inputs for fertilizers, are doing quite well since they simply mine and deliver the product.

The chemical manufacturing segment is an interesting place right now and one worth a look for investors.

If you need some names to start with, check out our list of top searches from the data table above.


Food Inflation May Stick Around

Key Takeaways

  • Farmers are dealing with skyrocketing chemical costs on everything from fertilizers to herbicides.
  • The USDA predicts farming income, which had a record year in 2016, will drop 7% in 2022.
  • Farmers face higher input costs on everything from feed to farming equipment.
  • On top of everything, congestion at the ports make it difficult for agriculture exports to leave the country.

Last month, the Consumer Price Index (CPI), showed food prices jumped 7.0% over the past year.

Since crops are replanted every year, food inflation tends to ease rather quickly.

That might not be the case going forward.

Farmer Inflation

2021 was a fantastic year for farmers.

Rising crop prices drove a sharp increase in U.S. farm income.

Farmers also benefited from years of subsidies instituted by the Trump administration to alleviate pain caused by tariffs.

One year later, the script has flipped.

The U.S. Agriculture Department forecast farm income to fall 7.9% in 2022.

Global shortages of chemicals including phosphate, ammonia, potash, and urea used to make fertilizers eroded farmers’ profit margins.

Those same shortages helped companies like Mosaic (MOS), CF Industries (CF), and Intrepid Potash (IPI) have solid years in 2021.

Yet, that’s just one part of the problem.

Farm equipment has gotten significantly more expensive as well.

New machinery prices have been rising around 4% per year over the last decade.

Like cars, farm machinery new and used is in short supply, driving prices sky high. Bidding wars are pushing prices to egregious levels.

For example, a 16-year old trailer in Iowa that sold for $33,500 probably cost $30,000-$32,000 when it was new.

Export Problems

At the ports, farmers are finding it difficult to get product shipped out due to congestion.

Since pushing an empty ship back out to sea takes less time than reloading, the ports of L.A. and Longbeach have cut back export volume to handle record imports.

That’s left some farmers with product waiting weeks to go to market.

The Bottom Line: All these factors point to higher food costs that aren’t likely to disappear with next year’s crops.

For food prices to stabilize, we’ll need to see input materials into machinery drop as well as the inventory of that machinery rise.

Hopefully, congestion issues clear soon to at least give us one less headache.

In the meantime, fertilizer and chemical manufacturers will continue to make record profits.

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