CFDs on WTI Crude OilEducation
Looming Threats to Food and Energy Security
Updated
The global food and energy markets face growing uncertainty and volatility in the coming years due to converging factors that could lead to supply shortages, price spikes, and potential shocks.
One concern is the impact of declining sunspot cycles on the climate. Scientists predict that a grand solar minimum could occur in the coming decades, causing global cooling and disruptive weather patterns, negatively affecting grain production in key agricultural. With grain supplies tightened, any further demand increases would send prices a lot higher.
Global grain consumption has grown steadily, increasing by over 2% in the last 25 years. Rising disposable incomes in developing countries have enabled consumers to add more protein foods like meat and dairy to their diets. However, this dietary shift puts pressure on grains, since over 8 pounds of grain is needed to produce just 1 pound of beef. Hence, increased meat consumption indirectly leads to higher demand for grains.
The ongoing war in Ukraine has severely impacted global grain markets, compounding the risks. Combined, Russia and Ukraine account for nearly 25-30% of worldwide wheat exports. With both countries blocking or threatening to destroy grain shipments, the conflict poses a huge threat to food security especially in import-dependent regions like North Africa and the Middle East. Export restrictions like India's recent rice export ban to protect domestic food security are also tightening global grains trade. As supplies dwindle, agricultural commodities become more vulnerable to price shocks.
These supply uncertainties make soft commodities like cocoa, coffee, and sugar especially at risk of price spikes in coming years. Prolonged droughts related to climate cycles like La Niña and El Niño could severely reduce yields of these crops grown in tropical regions of Southeast Asia, Africa, and South America. For instance, a drought in West Africa's prime cocoa-growing areas could significantly impact production. Cocoa prices are already trading near 6-year highs in anticipation of shortages. If drought hits key coffee-growing regions of Vietnam and Brazil, substantial price increases could follow.
Similar severe drought potential exists in the U.S. Midwest this summer. Lack of rainfall and moisture could cause severe yield reductions in America's corn and soybean belts. Since the U.S. is the world's largest corn and soybean exporter, this would cause severe upward price pressures globally. The rise in agricultural commodities ETF Invesco DBA likely reflects investor concerns about impending supply shortages across farming sectors, and its price might be leading the spot price of agricultural commodities.
Fertilizer prices also contribute to food market uncertainty. In 2021-2022 fertilizer prices skyrocketed due to energy costs rising, directly raising the cost of food production. When fertilizer prices surge, it puts immense pressure on farmers' costs to grow crops and indirectly influences food prices. However, falling fertilizer prices do not necessarily translate into lower food costs for consumers. Fertilizer prices have dropped substantially over the last year, without that meaning everything is fine with fertilizer production. Dropping fertilizer prices could actually indicate a slowdown in agriculture, as, lower demand for fertilizers could mean fewer farmers are investing in maximizing crop yields. In that case, food production may decline leading to higher prices due to supply and demand fundamentals. At the same time, if other farm expenses like machinery, seeds, or labor rise due to factors like high energy costs, overall production costs could still increase even as fertilizer prices decline.
The energy markets face a similar mix of uncertainty and volatility ahead. Despite substantial declines in prices, the energy sector ETF XLE has held up well, suggesting investors anticipate a rebound in oil and natural gas. Fundamentally, both commodities could trade a lot higher in the long term, however in the medium term I believe that oil is poised to drop further to the $55-60 area before tightening supplies lead to much higher prices. Essentially what’s missing is a capitulation to flush bullish sentiment, and then lead to much higher prices. At the moment the market has found a balance between a weakening global economy and OPEC+ supply cuts.
A key uncertainty is China's massive oil stockpiling in recent years, now totaling nearly 1 billion barrels. If oil exceeds $80-85 per barrel, China could temper price rallies by releasing some of these reserves, as it did in 2021. With China's economy in turmoil, further reserve releases may be needed to stimulate growth, but it’s unclear whether its economy will be able to come back easily. Weak demand from China is already an issue for the oil market, and releases from the Chinese SPR could restrain oil prices over the next year. However, on the bullish side, the world remains heavily dependent on fossil fuels lacking viable large-scale alternatives, even as ESG trends continue. OPEC's dwindling spare production capacity raises risks of undersupply. Even an economic recession may only briefly dampen oil prices before supply cuts by major producers again tighten markets.
Ultimately, sustained high energy prices will restrain broader economic growth by reducing demand across sectors. The outlook for food and energy markets remains uncertain, with significant risks of continued volatility over the next few years. Multiple converging factors point to potential supply shortages and price spikes across agricultural commodities and fossil fuels. While prices may fluctuate in the short-term (6-12 months), the medium-term trajectory appears to be toward tighter supplies and higher costs for food and energy (2-5 years). To close on a more positive note, I believe that food and energy prices will see significant deflation as extreme technological progress pushes prices down in the long term (5+ years).
One concern is the impact of declining sunspot cycles on the climate. Scientists predict that a grand solar minimum could occur in the coming decades, causing global cooling and disruptive weather patterns, negatively affecting grain production in key agricultural. With grain supplies tightened, any further demand increases would send prices a lot higher.
Global grain consumption has grown steadily, increasing by over 2% in the last 25 years. Rising disposable incomes in developing countries have enabled consumers to add more protein foods like meat and dairy to their diets. However, this dietary shift puts pressure on grains, since over 8 pounds of grain is needed to produce just 1 pound of beef. Hence, increased meat consumption indirectly leads to higher demand for grains.
The ongoing war in Ukraine has severely impacted global grain markets, compounding the risks. Combined, Russia and Ukraine account for nearly 25-30% of worldwide wheat exports. With both countries blocking or threatening to destroy grain shipments, the conflict poses a huge threat to food security especially in import-dependent regions like North Africa and the Middle East. Export restrictions like India's recent rice export ban to protect domestic food security are also tightening global grains trade. As supplies dwindle, agricultural commodities become more vulnerable to price shocks.
These supply uncertainties make soft commodities like cocoa, coffee, and sugar especially at risk of price spikes in coming years. Prolonged droughts related to climate cycles like La Niña and El Niño could severely reduce yields of these crops grown in tropical regions of Southeast Asia, Africa, and South America. For instance, a drought in West Africa's prime cocoa-growing areas could significantly impact production. Cocoa prices are already trading near 6-year highs in anticipation of shortages. If drought hits key coffee-growing regions of Vietnam and Brazil, substantial price increases could follow.
Similar severe drought potential exists in the U.S. Midwest this summer. Lack of rainfall and moisture could cause severe yield reductions in America's corn and soybean belts. Since the U.S. is the world's largest corn and soybean exporter, this would cause severe upward price pressures globally. The rise in agricultural commodities ETF Invesco DBA likely reflects investor concerns about impending supply shortages across farming sectors, and its price might be leading the spot price of agricultural commodities.
Fertilizer prices also contribute to food market uncertainty. In 2021-2022 fertilizer prices skyrocketed due to energy costs rising, directly raising the cost of food production. When fertilizer prices surge, it puts immense pressure on farmers' costs to grow crops and indirectly influences food prices. However, falling fertilizer prices do not necessarily translate into lower food costs for consumers. Fertilizer prices have dropped substantially over the last year, without that meaning everything is fine with fertilizer production. Dropping fertilizer prices could actually indicate a slowdown in agriculture, as, lower demand for fertilizers could mean fewer farmers are investing in maximizing crop yields. In that case, food production may decline leading to higher prices due to supply and demand fundamentals. At the same time, if other farm expenses like machinery, seeds, or labor rise due to factors like high energy costs, overall production costs could still increase even as fertilizer prices decline.
The energy markets face a similar mix of uncertainty and volatility ahead. Despite substantial declines in prices, the energy sector ETF XLE has held up well, suggesting investors anticipate a rebound in oil and natural gas. Fundamentally, both commodities could trade a lot higher in the long term, however in the medium term I believe that oil is poised to drop further to the $55-60 area before tightening supplies lead to much higher prices. Essentially what’s missing is a capitulation to flush bullish sentiment, and then lead to much higher prices. At the moment the market has found a balance between a weakening global economy and OPEC+ supply cuts.
A key uncertainty is China's massive oil stockpiling in recent years, now totaling nearly 1 billion barrels. If oil exceeds $80-85 per barrel, China could temper price rallies by releasing some of these reserves, as it did in 2021. With China's economy in turmoil, further reserve releases may be needed to stimulate growth, but it’s unclear whether its economy will be able to come back easily. Weak demand from China is already an issue for the oil market, and releases from the Chinese SPR could restrain oil prices over the next year. However, on the bullish side, the world remains heavily dependent on fossil fuels lacking viable large-scale alternatives, even as ESG trends continue. OPEC's dwindling spare production capacity raises risks of undersupply. Even an economic recession may only briefly dampen oil prices before supply cuts by major producers again tighten markets.
Ultimately, sustained high energy prices will restrain broader economic growth by reducing demand across sectors. The outlook for food and energy markets remains uncertain, with significant risks of continued volatility over the next few years. Multiple converging factors point to potential supply shortages and price spikes across agricultural commodities and fossil fuels. While prices may fluctuate in the short-term (6-12 months), the medium-term trajectory appears to be toward tighter supplies and higher costs for food and energy (2-5 years). To close on a more positive note, I believe that food and energy prices will see significant deflation as extreme technological progress pushes prices down in the long term (5+ years).
Note
Little has changed here. The risks in the global economy remain, and the ongoing conflict in the Middle East is exacerbating things. The potential for disruptions in food and energy supplies has increased. In the near term, it's conceivable that prices for both food and energy could rise further, though I believe their appreciation will be constrained. Given the current state of affairs, I don't anticipate oil exceeding $105 per barrel over the next month. If it reaches that level, a collapse would likely ensue. I continue to expect $55-60 per barrel in due course. Elevated oil prices will tighten financial conditions further, and the recent rate hikes are applying significant pressure on oil.
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