The war in Ukraine is creating food shortages … historic spikes in related input costs … the growing risk of an inflationary food-price spiral … how to protect your wealth

There’s conflicting news about Russia/Ukraine peace efforts.

Yesterday, there was optimism. The Wall Street Journal reported that Russia claimed it would significantly decrease its military activities around Kyiv and Chernihiv, to increase trust during negotiations.

Today, pessimism. The Wall Street Journal features a story quoting Kremlin spokesman Dmitry Peskov, saying:

No one said that the sides have made headway. We can’t point to anything particularly promising.

The world needs this conflict to end for many reasons. But at the top of that list is one thing:

Avoiding global food shortages, and the resulting domino effect of humanitarian, economic, and geopolitical crises.

As we’ve noted before in the Digest, Ukraine accounts for more than 10% of the global wheat market. Throw in Russia, and that share jumps to more than 30%.

It’s not just wheat. There’s also corn and barley, which are important in feeding livestock. Together, Ukraine and Russia make up just under 30% of the world’s barley supply.

Then there’s sunflower oil, which is one of the world’s main vegetable oils used for cooking. Ukraine and Russia make up 80% of the global supply.

Big picture, it’s estimated that Ukraine and Russia alone account for 12% of the “calories” that the world consumes.

With all of this in jeopardy, the risk of global destabilization from food shortages is accelerating at a dangerous pace.

From Bloomberg:

The food shock in Ukraine looks devastating.

Grain and sunflower oil in storage from last year’s harvest can’t be shipped because of fighting and port closures.

Shelling and fuel shortages may interfere with spring planting and fertilizer farmers need to apply to the winter wheat crop as it emerges from dormancy.

Infrastructure damage, labor shortages and continuing conflict could also compromise the summer harvest and transportation of whatever is produced.

Sanctions and disruption of Black Sea shipping routes also will limit Russian exports, beyond grain.

Russia, a key global supplier of fertilizers, earlier this month instructed producers to halt exports. Russian ally Belarus, another leading fertilizer source, is also being hit with sanctions.

***Let’s zero in on fertilizer to better understand the scope of the problem

The largest exporter of fertilizer in the world is Russia. Belarus, a puppet state of Russia, is number six.

Together, the two countries make up 17.8% of global fertilizer exports.

So, given sanctions and disruptions to these exports, what’s happened to global fertilizer prices in recent weeks?

From Bloomberg:

Fertilizer prices continue to spike to records as Russia’s invasion of Ukraine puts a massive portion of the world’s fertilizer supply at risk, adding to concerns over soaring global food inflation.

A gauge of prices for the nitrogen fertilizer ammonia in Tampa surged 43% to $1,625 per metric ton Friday, a record for the 29-year-old index.

Production outages and tight global supply are driving the jump, according to a note from Bloomberg Intelligence.

Below, you can see the price of North American fertilizer exploding to record highs.

One analyst on Bloomberg TV noted that fertilizer prices, which usually make up about 30% of a farmer’s budget, will cost 50% this year.

While domestically this is troubling on many levels, the impact on the developing world is far more dire.

From Bloomberg:

The disruption of crucial food supplies has already prompted protests in Iraq over food price increases that government officials blamed on the Ukraine war.

Egypt, the world’s biggest wheat importer, turned to the IMF for assistance Wednesday as food and fuel price surges put pressure on public finances.

The fallout is reminiscent of the last major spike in global food prices that became a catalyst for the 2010-2012 Arab Spring, which toppled long-ruling governments in Tunisia, Libya and Egypt. It also ignited Syria’s brutal civil war and the resulting refugee crisis in Europe…

…cost increases stemming from the war and resulting sanctions on Russia will — without action — push more than 40 million additional people into extreme poverty, defined as subsisting on less than $1.90 a day…

Mark Lowcock, former UN under-secretary-general for humanitarian affairs and emergency relief coordinator, said billions of dollars in additional food aid will be required to avert “mass starvation” in poorer nations.

Tragically, this is happening even while some farmers cut their output.

For example, The Wall Street Journal tells the story of an Argentinian wheat, corn, and soybean farmer who will cut production 30% this year.

Why?

The cost of fertilizer is now too high.

***Are we beginning to see a self-perpetuating inflation food spiral?

Last week, at the grocery store, I saw a woman with roughly 25 packs of chicken breasts and probably 40ish packs of spaghetti in her cart.

This hoarding, while understandable, is making the problem worse.

From Barron’s:

Efforts by households to stockpile and pull forward spending is the very behavior economists and central bankers fear, given the self-fulfilling nature of inflation expectations and their crucial role in keeping overall prices stable.

The idea: If consumers expect higher prices tomorrow, they will buy today and help ensure those higher future prices.

Market-based measures of inflation expectations have jumped since the Ukraine invasion; survey-based measures also reflect elevated expectations, though the latest surveys were conducted before the invasion of Ukraine.

Consumers’ rising expectations for higher prices aren’t a coincidence. D’Acunto says overall inflation expectations are most heavily influenced by changes in grocery prices, even as such prices are stripped from core inflation metrics.

Two months ago, about a fifth of U.S. households said they expected broad price inflation of at least 10%. D’Acunto says that share has shot up to over 60% of households as grocery prices quickly increase.

The upshot: As grocery prices climb, so do the odds of unhinged inflation expectations, opening the door to an upward spiral in prices.

As we’ve noted in the Digest, higher food costs greatly increase the risk of recession. That’s because when the U.S. consumer has to pay exorbitantly higher prices for the basics of living, there’s less money for discretionary purchases that keep the economy healthy.

And in fact, yesterday, the recession-watch indicator we’ve been tracking for months – the “10-2 spread” – triggered.

If history repeats itself, this event suggests we’ll have a recession within the next two years.

***So, what can you do about all this?

First, to be clear, if the world continues down this path toward food scarcity, it will be an unspeakable tragedy. So, our greatest concern is with the wellbeing of the less fortunate around the world.

That said, the potential food/commodity inflation spiral poses serious risks to your wealth.

As ways to try to protect your purchasing power, you could look to the Invesco DB Agriculture Fund, DBA.

Invesco describes it as a fund “designed for investors who want a cost-effective and convenient way to invest in commodity futures.”

Here are its top 5 holdings:

It’s up 12% here in 2022.

If you’d like agriculture exposure blended with other commodities, there’s the Invesco Optimum Yield Diversified Commodity ETF, PDBC. Its top holdings include aluminum, zinc, copper, oil, wheat, soybeans, corn, and gold. It’s up 28% on the year.

***For one of the purest plays, you could invest directly in top-tier fertilizer companies

This is what legendary investor, Louis Navellier, has been doing in Accelerated Profits.

I won’t reveal Louis’ specific picks out of respect for subscribers, but if you’re looking for ideas, some of the largest fertilizer companies in the world include Yara International, Nutrien, and Mosaic.

As you can see below, on the year, they’re up, respectively, 11%, 37%, and 70%

Wrapping up, let’s cross fingers that peace talks in Ukraine lead to the resolution of this conflict.

If not, the domino effect will be a humanitarian disaster with significant economic fallout. If you’re looking for ways to hedge your portfolio, take a look at the possibilities we’ve highlighted today.

Have a good evening,

Jeff Remsburg