Odd Lots - A Historic Disruption To The World's Wheat Supply

Episode Date: March 24, 2022

When it comes to commodities, Russia's invasion of Ukraine has had a notable impact on the price of oil and natural gas. It's also a huge deal for wheat, and food more broadly. Ukraine is a massive player in the global wheat market, and the planting season is basically right now. What's more, Russia is also a big wheat seller, and Belarus is a big supplier of fertilizer. On this episode of Odd Lots, Tracy Alloway and Joe Weisenthal speak with Scott Irwin, an agriculture economist at the University of Illinois, about what he calls the biggest disruption he's seen in his career.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, I feel like one of the things that we do is just keep revisiting old themes and sort of on this permanent rotation. And I literally think it was like basically a year ago.

I think it was exactly a year ago. We did an episode on the rising price of grains, particularly corn, wheat and soy. and since then, let's just say we have to revisit that now. Yeah, well, we were just talking about this. But I think a year ago, you know, the theme was the weather hasn't been that good, crops haven't been that good, food prices are rising, China is buying a lot, and that's adding additional pressure on supply. And now we have to throw Russia, Ukraine, into the mix.

And it just seems like a pretty bad situation has possibly gotten a whole lot worse. Right. And so when people think about the commodity effects of that, of the war, of that conflict, I think predominantly people think about oil and gas. And of course, we have seen upward pressure on both. But Ukraine is also a massive exporter of wheat. Belarus, which has also come under sanctions, is a big exporter of fertilizer. And so we have had this already tight market for commodities, for grains, for some of the conditions. mentioned, and they've just gotten a lot tighter. Yeah, and of course, the one thing that I'm sure Oddlots listeners know about the commodities market by now is that everything tends to be interconnected. So if you get a rise in the price of natural gas, for instance, that can end up feeding through into the price of fertilizers.

I saw one news story right before we came on saying that Yara, which is one of the big fertilizer producers in Norway, is curtailing its production of fertilizer, because, because of the gnat gas price surge. And then you have things that happen in the commodities market that feed through into other commodities. So again, another example here, the price of wheat is expected to increase production of pork because, of course, a lot of pigs in Europe, in particular, eat wheat as their food grain. So everything's interconnected, and it becomes really difficult to predict and track a lot

of these movements and impacts. Exactly right. Well, you know, we mentioned that we talked about this a year ago, and so we are going to bring back the guest we spoke to before and try to wrap our heads around what is going around now because the one other difference is that anxiety about inflation overall much higher today than it was in early 2021, even as we started to see these prices rise. So complicated time, complicated situation. I'm very excited to bring back Scott Irwin. He's an agriculture economist at the University of Illinois. So, Scott, thank you so much for coming back on Oddlots. My pleasure.

Really look forward to it. Absolutely. Great to have you back. Let's start with actually right before the invasion. Just talk a little bit about how tight or how would you characterize the conditions in the grain market, you know, sort of early February 22. We were kind of scraping along. Prices were certainly elevated. relative to historical averages.

The latest thing that the markets had absorbed was a less than stellar growing season for South American soybeans. But we were getting along, anticipating a pretty good spring and big plantings of corn and soybeans here in the United States that would probably help smooth that out. We're going to have some volatility maybe related to summer weather here in the U.S. But I wouldn't say that, you know, we thought that anything was way out of bounds historically. So how big a deal is Russia invading Ukraine from a grains or agricultural perspective? Because on the one hand, you hear a lot that the Ukraine in particular is, you know, known as the breadbasket of Europe. There's a lot of production there. But on the other hand, farming is an industry that is familiar with supply shocks.

You know, things happen. There's, I guess, bad weather and pestilence as well. So how big a deal is this? Couch it in historical terms. Sure. This is the way that I try to communicate just how big of a whole this war is blowing in the global grain markets. the Ukraine in recent years has planted about 59 million acres of their top six crops, wheat, sunflower, soybeans, corn, barley, and what they call rapesee. So how big is that?

And that's what's under threat of potentially not being planted at all this spring due to the war. That's almost exactly equal to the total planted area of crops in Illinois. and Iowa. So you're just blowing that right, potentially, out of global markets. Imagine that. Now, they're not as productive. Those acres don't grow as much as Iowa and Illinois do. But that right there is about 4 billion bushels of production that potentially, if it doesn't get planted or the vast majority doesn't get planted, you're just taking that off.

So that's just the immediate war impact. Then they have on the other side, Russia, they're not going to probably have any problems growing their crops this year. The question is how much of it will be available to the world markets. Russia is the world's largest exporter of wheat. And again, the way I try to put that into perspective, well, you know, with U.S. production, what would it take for U.S. wheat production to replace what's lost potentially for Russia? Well, Kansas is our biggest winter wheat producer here in the United States, and it would take four million Kansases to replace what was lost.

Wow. That's quite a striking way to put it. You know, we're recording this in the middle of March. Actually, recording date is out March 14. where are we in the cycle? And so you talked about plantings in Ukraine right now. What needs to happen? Like, are we talking about in the next couple of weeks? Where exactly is the timing of this? In the Ukraine and Russia, their biggest wheat crop is winter wheat, which was planted last fall. It basically goes into hibernation in the winter, and then it's planted and it's harvested in the early summer.

That's already growing in both countries. then the question is how much of it will be available to be harvested and moved into international markets in the Ukraine. But the really big danger is the number one crop in terms of volume in the Ukraine is actually corn, which the vast majority of is exported internationally. Ukraine exports now over a billion bushels of corn every year. And the planting window in Ukraine, for their spring crops. It's almost the same as the United States. It's not really very much different. They will be planting in April and early May. So they're really literally just a couple of

weeks from going back, or they would intend normally to go back to the fields in a couple weeks. So we've seen the price of wheat shoot up really dramatically, and the price of corn has gone up, too, but not as much as wheat. What exactly accounts for the discrepancy there? Well, because combined the Ukraine and Russia is a significant component of the total exports of wheat in the world. Russia's number one and Ukraine off the top of my head, I think they're second. When we think about wheat, where does it go? What is the end destination of wheat look like?

And Tracy mentioned something that in Europe, the pigs eat wheat, and how much is bread, how much is pasta, how much is feed? What is the ultimate distribution? And what kind of substitutability is there between grains such that if the price of wheat soars, then the end buyer can maybe switch to a cheaper commodity? For feeding animals, for livestock feeding, there's a great deal of substitution. Basically, there's the potential for 100% substitution if you have those supplies. Where there's real concerns is, you know, the vast bulk of wheat is actually used for human consumption.

Bread, pasta, crackers, things like that. This is potentially huge problems for, you know, lower to middle income countries in North Africa and throughout the Middle East that have relied very heavily on them. imports of wheat from this area, and that's almost all for human consumption. Egypt is kind of the prime example. You know, Joe mentioned the substitution effect and the idea of people, you know, maybe instead of wheat, you use something else to feed your pigs. But could you walk us through exactly what happens when you get a price shock like this? Like, how does it filter through the broader market?

So prices increase. And then do pig farmers immediately start deciding to feed their herds, something else? Do farmers respond to the price increase immediately by altering their planned crops? Like, what exactly is the sequence of events that happens? Well, all of this is really going on at the same time. And this is one of the reasons why in this kind of circumstances why, in this kind of circumstance, you see just such incredible volatility or spiking of prices in wheat because of the nature, what I would say is the natural inflexibility built into the consumption side of commodities

like wheat, corn, and soybeans in the very, very short run. On the animal side, yes, there's some short run substitution in terms of feeding, but that takes some time. And, you know, the animals that are there have to be fed something. So this is the heart and soul of the source of what economists called the short run inelasticity of demand for agricultural commodities. So on the animal side, the animals have to be fed and there's limited substitutability. You know, you have to get different suppliers. Commodities have to be moved around in terms of this substitution. It will happen, but it just takes time. And then that's even harder on the human side when, as we know, diets are relatively fixed. And, you know,

countries like Egypt will do everything they can to probably try to increase subsidies and insulate their population from these price increases. But if wheat is simply not available in a place like that, that's a huge problem. There's really, besides aid from other countries, it's very difficult to change that diet in a matter of a few weeks. Okay, so you walk through, we get this price surge, what happens on the consumption side. What happens on the supply side? What are, A, is there still time for farmers in the U.S. or anywhere else to change their choice of crops or to reallelike acreage. And is there anything anyone, whether in the U.S. or elsewhere, can do to increase supply overall in a short to medium period of time? What is the opportunity to replace the lost

wheat? A great question. In wheat, unfortunately, kind of in a devilishly tight situation here, because the biggest wheat crop in the world, as I mentioned before, is winter wheat. And for the northern hemisphere, that was already planted. And there's just nothing you can do now in terms of increasing the winter wheat supply in the northern hemisphere of the world because that planting window was last fall. Now, the southern hemisphere can, you know, begin planting winter wheat right now. and there are some large producers like Australia, but the southern hemisphere doesn't tend to be that large of a wheat producer. So maybe we'll get some more out of that,

but that's six, eight months down the line. So the short run on the wheat supply is all going to be with spring wheat. And there is some scope for the ability to expand production of spring wheat, but spring wheat tends to be grown in far northern areas, of the Great Plains of the U.S. and into Canada. And so there'll be probably some increased production there, but it can't show up until at the earliest September. So, you know, that's the vice that the wheat market is in in the world,

is that our ability to basically really alter availability is through the channel of spring wheat, which is a relatively minor cross. compared to the major crop of winter wheat. So that makes it hard. You mentioned Russian winter wheat at the beginning. And of course, you know, that's expected to still grow and probably be largely unimpacted by the events in Ukraine,

but no one can get to it or fewer people can get to it because of the sanctions in place. What are the chances that some of that is able to leak into the market? Well, that's going to be the great question, because we know, first off, there's what economists call trade diversion in these kinds of situations. You know, not everyone is going to follow the sanctions. For example, we expect that some of Russia's wheat exports will now go to China so that they can use that to feed their animals and contribute to their diet. So that's trade diversion will happen. The big question of my mind is always leakage that, you know, not speaking to the morality

of the situation, but we know that historically that large international commodity trading firms are experts at figuring ways semi-legally is the way I would put it around the sanctions and to move these commodities around the world. Yet, there's a cost to that, you know, that they'll only buy the wheat from Russia, deep discounts. It takes time for these alternative channels and legalities to be worked out. And so inevitably, you know, trade diversion and leakage can't offset the full effect of the sanctions. And what, you know, we're all trying to figure out,

And that's what the market has to assess in real times, you know, well, what's that leakage and a trade diversion going to look like? So we mentioned it at the very beginning in the intro. But when we had you on a year ago, I think it was about a year ago, the story at the time seemed to be about very aggressive Chinese buying and building up stocks, building a buffer stocks. And I think I saw a stat recently. I forget the number. I'm not sure how many years worth of wheat China currently has. But since you mentioned that China is likely to be a destination for whatever wheat gets out of that market, out of the Russian market, what is the state of Chinese buying? Is it still in accumulation mode? Has it balanced out the stocks?

What kind of deficit or position is China in right now? I have to admit that we're all looking through the glass darkly in terms of China's grain reserves. And that's an official state secret. And so everybody just guesses at it. So my perception is that they have done quite a bit of reserve rebuilding. But at the same time, they're in a phase of rapidly rebuilding their animal herds. And so in that race between increasing consumption from their animal herds versus their rebuilding, nobody really knows. And I do know that they've been back in the grain market for U.S. supplies in a big way in the last

couple of weeks, which everybody's expecting. What we have seen for 2022 before the Ukrainian crisis was that China's soybean buying was back to basically the trend they were on before our trade war, which means it's huge. They weren't buying as much corn in 2022 as they did in 2021. It had backed off some that I suspect that they'll be back closer now in 2022 now than they had planned because of the lack of availability of Ukrainian supplies. But that story remains to be written. Today's show is brought to you by Vanguard. To all the financial advisors listening,

Let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk Vanguard Marketing Corporation distributor. There's a healing element in salt, in sweat, in tears, in the ocean. In Halifax, being surrounded by salty water and fog is just enough grit to help polish away the pressure of to-do lists. to just make time for things that feel good, to let the salt cure whatever ails you.

Halifax could be the break that finally leaves you feeling like you took one, as long as you're willing to rub salt in your wounds. Discoverhellifax.ca.ca. This might be a very basic question, but if supply is constrained and, you know, everyone in the world presumably wants to keep wheat prices relatively low so that the price of bread doesn't go up too much. China is still buying large amounts.

How does existing supply get allocated? Could we see a return or even more sort of food supply nationalism and the idea that people are going to be keeping more of their own crops closer to home? This is the great danger in global grain markets right now, Tracy. This is what I'm most concerned about, which history shows that when you get in these huge scary price spikes, particularly for a food commodity like wheat, that there's a tendency for a bit of panic to set in and countries begin shutting off exports to basically protect domestic supplies and protect domestic consumers. And that really leaves importers, particularly importers in the not-rich countries, out in the cold. And we're already seeing that kind of bang, bang, bang, beginning to happen. And so if you lock up supplies in some, it doesn't take very many exporting countries,

then that really makes prices for everybody else explode. and puts more of the burden on generally poorer importing countries, and that's where things politically get really explosive. And so that's a real concern that I have, because the market's going to do its job. The market's job is basically to run the price of wheat up high enough that you ration current demands enough so that the globe has something left over at the end of the year. The problem, but in order for the market to do that job, somebody has to get priced out of the global market.

And the job of trade is for the market to then spread around available supplies to to the highest bidder. and some people that as a policy matter that we probably don't want priced out of the market can easily get priced out of the market as the market does its job. So that's what happens in the very short run. And the other side of the market's job is to run the price up of wheat high enough that as we can expand acreage and production to adjust to this, that the supply responds. And it will happen.

It always does, but it can take a year or two for this kind of shock to fully be absorbed, and we get the supply response in terms of expanded acreage and production around the world. So the shocks from this are going to reverberate for some time. Yeah, there's so many follow-up questions I have to that. But the first one, when price of oil and also gas, but when the price of oil surges, it immediately becomes a political question. And people start turning to elected leaders. What are you going to do about this?

What can we do to say increase exploration or drilling in the United States? Or what can Germany do to cut off its reliance from Russian gas, et cetera? Are there policy levers that countries, whether rich or poor, can poll here? But I'm thinking in the United States, for example, is there something equivalent? Is there something for the USDA or the White House to think? about doing during such a time of high prices and tight supplies? Well, there is one that could be considered in the United States. We have something that's called the Conservation Reserve Program in the United States that currently contains 22 million acres of previously cropped land that has been taken out of production, presumably because it's most environmentally sensitive in terms of windows.

and water erosion, or it has biodiversity, really a lot of it's for pheasant hunting. So there's that acreage that could be considered for maybe a special one-time exemption from the current long-term contracts that are required to place acreage into that reserve. So we have an acreage reserve, something like the Strategic Petroleum Reserve, that at least could be considered. It's very controversial, as I found out when I suggested, a couple weeks ago. But basically, my argument is pretty straightforward, and you can hear it through the conversation we've had today. I believe this is the largest supply shock of my lifetime in global grain markets if the conflict continues. and severely harms planting in the Ukraine.

And so we need to at least look at extraordinary measures like this here in the U.S. The EU is ahead of us. They're already apparently making plans to make their what they call set aside acreage available for production this year. And those policy means you might think, oh, my gosh, you're well. You can plant this spring, but we don't get that until next. fall, but the markets will react to those moves now because the markets always are in an anticipatory mode. And if they see that there's going to be somewhat more supply than they would normally think that will have an impact now. And so that's in the EU and here in the U.S.,

those are pretty much the only policy levers that we have. No one has huge, grain stocks piling up in warehouses anymore like we used to, say, in the 1980s. Nobody has those. So the only thing we really can do is try to juice up acreage this spring. Wait, could you walk us through exactly why this is so controversial? Because I did see some people on Twitter who were pushing back. And, you know, initially if someone says, well, the price of wheat is going up a lot, there might be food shortages, let's increase acreage. It sounds like a very, like good thing to do, but I imagine there are those environmental concerns and other issues with it. So what are those exactly? Well, there's what I would call a, you know, there are the environmental

concerns and then they're the practical pushback on that idea. The environmental is these are supposed to be a highly erodable acres and less productive acres that are put into the conservation Reserve. And there's no doubt that that is true. And so you're not getting your prime acres, most productive acres, put in. And so if you took them out, people say it wouldn't be that productive. My counter to that is the USDA has actually done some great work tracking parcel by parcel what happens to acres in the past as they've come out of the Conservation Reserve, because it turns over. There's acres going in every year. There's acres coming out without getting and all the details. But over time, the acres that come out, over 80% go back into crop production

or some kind of annual crop. So it can be used. So that's the one biggest, is, you know, these are supposedly our most environmentally sensitive acres. So why would we want to mess with them? And then the other point is, you know, that those acres have biodiversity, benefits in particular, as I said, for recreation and animal biodiversity. And so those benefits are there. And in my mind, probably the bigger concern is the practical. It's very, very late in the calendar for farmers to adjust their plans to try to farm those acres. You know, even if you do try to farm the CRP acres, you have to plow up something that is in grass. Can you get the seed and fertilizer that you need, even if you want to do this? So there are some very significant

practical concerns to doing this. But I'm a big believer as an economist. I mean, if there were ever incentives in place to do what one of my old professors at do, Earl Butts was famous for saying when he was Secretary of Ag in the 1970s in the Nixon administration, he was famous for when that price spike went so high that farmers would plant fence row to fence row. And the incentives are in place to go fence row to fence row. And the other is a policy consideration. You know, there will be differences of opinions about this. But these are extraordinary conditions. And I think going towards what you said, Tracy, maybe we should consider doing what we can, even if it's not our most productive acres, maybe if it won't make a huge

difference. But why not do what we can to address these supply issues, even if they're not going to make a huge difference? But even a few hundred million extra bushels of wheat in this country could go along ways to spanning the gap in places like Egypt potentially as we go through the next year. So that's my counter argument to those that criticize that idea. That was great. And that was a very interesting answer. I want to continue on the supply side aspect of the question because you mentioned, okay, is the fertilizer going to be there?

And again, there's something I think about, let's say oil, which is that even if there were some sort of impulse to explore more oil. There's a lot of tightness in labor markets at the oil patch. People talk about the shortage of steel pipes and the shortage of frax and what are, you know, even prior to this crisis, how have shortages in general and tight labor markets, how are they affecting the farmers that you speak to in the grain area? And what kind of scarcity of other commodities in labor make the supply side perhaps less rapid, or how much of a challenge would that be to scaling up more production? Excellent question. Farmers have been struggling on the labor side like everyone else, but I haven't really heard that that would be a significant constraint. You know,

farmers being farmers, they'll just work extra hours to get it done if they have to. The bigger concern is the availability of fertilizer and herbicides and pesticides and pesticides that they need. I think farmers were counting on all that working before the Ukraine crisis. And I think that was a reasonable position for the U.S. because we don't actually import that large of a proportion of our fertilizer, probably 15%. So I think that what we needed was probably in place in the United States, but it was a little iffy. But right now, when I talk to farmers, they're very nervous about just getting their chemicals and fertilizer supplies now. No one seems to be giving them firm answers on anything. So that's, that is what I'm hearing.

I think the supplies are there, but everything is just in such turmoil that if there's a place for a bottleneck, that is where it's going to show up this spring. I believe that for the planned acreage that we had before the Ukrainian crisis, that the vast majority of the supplies are there and they will eventually get through. but it makes one a little, I think a little sketchy how much we can expand beyond that, even with these great prices from what I'm hearing from farmers. What is the situation with fertilizers at the moment? Because, you know, as you mentioned, it seems like it's difficult to get information on supply, potentially, but we have seen some impact in the market already. And even before Russia actually invaded Ukraine, there's a lot of talk of tightness in that market.

Oh, clearly. I mean, we saw starting last fall that nitrogen fertilizer prices just spiked to, you know, extraordinary price levels, you know, more than doubled. And some of that is just demand side. natural gas prices were spiking, which is the primary input for making nitrogen fertilizer. So, you know, we were already struggling with extremely large increases in production costs, particularly for corn here in the United States. So that was already a major topic of conversation here in the corn belt. it seems like there's two, at least a couple of factors on the fertilizer side. There is the high cost of energy.

And I think Tracy mentioned in the beginning that we saw some fertilizer companies in Europe, just say, oh, we're not going to produce right now because it's not economical given the high cost of natural gas. And then my understanding is that Belarus itself is a huge exporter of either fertilizer or one of the key ingredients to fertilizer, maybe. Can you talk a little bit more about the sources of constraints and particularly the Belarus angle? Well, right. You know, Russia through Belarus is, you know, they're a huge exporter of potash. Right. You know, one of those things that we never talk about. You know, again, for the United States, that's probably not a huge issue, even though if we would lose 10 or 15 percent of your source. supplies, you know, that has an impact. But that's potentially next year a major issue for a

country like Brazil, which imports most of its fertilizer. And so that's, you know, the difference. I do not know the import percentages for Europe, but I suspect they're also very tightly tied to the Russian and Belarusian supplies. You know, and it, you know, it. You know, and one of the things that I find terribly interesting, a little factoid about how this stuff filters in, one of the Formula One Grand Prix teams is actually, or was sponsored by one of the largest Russian fertilizer companies, and his son was a driver on a Formula One team. And last week it was announced that Formula One kicked him out. Oh, I think I saw that headline.

I didn't make the connection of what was going on there. Yeah, they're one of those companies. And they were sponsoring a Formula One team, the Haas team. And, you know, they've canceled the Russian Grand Prix and kicked the fertilizer sponsor from Russia out of the program. I mean, it doesn't have much to do with this, but it just shows how extraordinary and how fast-moving these events are right now. You have the desire to help

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support by Santee Canada. There's a healing element in salt. in sweat, in tears, in the ocean. In Halifax, being surrounded by salty water and fog is just enough grit to help polish away the pressure of to-do lists. To just make time for things that feel good, to let the salt cure whatever ails you.

Halifax could be the break that finally leaves you feeling like you took one, as long as you're willing to rub salt in your wounds. DiscoverHelifax.ca.ca. I want to go back to things that can be done about the situation. And another thing that I've seen floated recently is this idea of maybe suspending incentives for renewable fuel production. So that would mean, you know, less corn being used for stuff like ethanol and more of it going into actual food production. How feasible is that politically and practically? Super question and something that I've been talking about in the last week. It's a little bit complicated, so I'll try to be really condensed in my answer. Short answer is that waiving the ethanol mandates here in the United States, I don't believe would have hardly any impact on the use of ethanol.

in the United States, which means it wouldn't have any savings in terms of corn bushels. And the reason is that ethanol has now become the cheapest source of octane available to gasoline blenders. And so without intending it to be, we ran an experiment about waiving the mandates and what would happen to ethanol use in the Trump administration through something called small refinery exemptions. And that was effectively waiving the mandate, and we didn't use any less ethanol. In fact, it grew a little bit as we waived the ethanol mandates. So I think that that would have no impact on corn usage. So the ethanol side of the equation in terms of our biofuel policy, to me, is a non-starter. It doesn't get us anywhere.

And it would have the follow-on effect of likely raising the price of gasoline a little bit, at least, and maybe noticeably. So I call that a robbing Peter to pay Paul policy response that doesn't really get us anywhere. where it's more interesting those ideas and doesn't get discussed enough is on the advanced or biodiesel, renewable diesel side. We are currently going through a boom in world veg oil prices through a boom and building what are called renewable diesel plants. Long story. But even there, if we waived those parts of,

of our RFS mandates. It's not very clear if it would have much impact because the largest policy subsidy for renewable diesel is not coming through the RFS, our national policy. It's coming through the low-carbon fuel standard in California. So to have really any guarantees, you want to take pressure off of world veg oil markets, you have to waive the California low-carbon standard and the RFS at the same time.

That doesn't seem likely to happen, particularly the California one. Can you talk a little bit about the effect of the end consumer? And so, you know, people don't eat wheat. Typically, they eat bread or they eat pasta. And I've seen some claims that, you know, in the end, like the actual wheat is not a huge source of a cost of loaf of bread or whatever it is. How much do these huge swings feed through to the price of finished goods that consume wheat? Again, critical point to understand. Here in the United States, on average, the cost of what a consumer buys in the grocery store for food,

only about 15% is represented by the cost of the raw commodity. So if you take a dollar of food expenditure, 15 cents is the raw commodity. Even if that doubles, you know, you go from 15 to 30 cents, that's 15 cents on a dollar. You know, it's noticeable, but it's not doubling because you have that pass-through effect. You know, in terms of the retail food price inflation, the number one factors are one, price of fuel, basically crude oil, because we have to move all this food around from producers to consumers. And then number two, wages because of all the processing that goes on. So those are the biggest determinants of retail food price inflation, although you are certainly going to see

added cost push inflation from these raw commodity price increases as well. But here in in the U.S., you're not going to see, you know, 50% food price inflation because the price of wheat's gone 50% for that reason. But that's not true in countries like Egypt, where those pass-throughs are much closer to one for one. I have one last question just based on that. Finally, like on this policy question, should rich countries think about aid to poor? I mean, that seems to be the recurring theme that we keep coming back to is, okay, U.S. reasonably insulated, yes, prices will rise, but obviously, as you just mentioned, there isn't anything close to a one-to-one pass-through. We're probably not going to have outright shortages in the U.S., but for poorer countries,

Egypt and elsewhere, rise in food prices going to have seriously, obviously devastating health consequences, devastating political consequences, consequences for stability overall. From a policy perspective, should leaders in rich countries be thinking about that, about what can be done with our own wealth or with our own stocks to ameliorate some of the negative effects on the countries that can't as easily afford these price swings? Absolutely. And the number one policy lever that should be pulled there is to the degree possible to persuade, exporting countries not to hoard their supplies exactly when they're most needed on world grain markets. That's number one, to try to stop that kind of beggar thy neighbor dominoes falling. That's number one. Number two, if there are ways to increase food aid where we can, that's important. And number three, this is a longer term response. But

we know that the best way is to continue supporting the growth of agriculture in these poorer areas. That's the number one way for their economies to develop and to become more self-sustaining in some of these key commodities areas. So support for their domestic agricultural producers is really important. For example, you know, you've got to be really careful. We've learned, Joe, that, okay, yeah, we have this emotional response and we want to really help poorer countries. And so we kind of dump food aid in there in the short run. Well, that just destroys the livelihood of farmers in those countries. So it's not as easy as just give them a lot more aid.

Well, Scott Irwin, always fascinating to catch up with you. And like I said, like we said in the beginning, it seemed like infinitely more complex than the first time we chatted. But thank you so much for coming back on odd lots. Yeah, I really always enjoy it and hopefully added a little signal and not too much noise to the conversation. Absolutely. That was very useful. And I learned a lot from it. So thank you. Yeah, that was great, Scott. Thank you. Tracy, I always really like speaking with Scott. It does feel like something like a wheat shortage. Here we might look at a screen and see horizon prices. But this is a theme that comes elsewhere. There's sort of a very, there's a difference between horizon prices and then places just not being able to get the actual commodity. Yeah, absolutely. And I think this is something that we actually wrote about for the Odd Lots newsletter recently, this idea of the difference between the finance. realm and the physical realm, which is something that it feels like the world is very much waking up to at the moment. But I also like Scott's nuance on the point of weak prices in the US and the idea that, well, if the raw material goes up a lot, that shouldn't necessarily

translate into higher prices for things like bread and pasta, because a lot of those are going to be driven by larger input costs like labor and energy. Unfortunately at the moment, uh, energy and perhaps labor as well are also going up. Right. So it's not exactly much consolation necessarily that the price of bread isn't entirely determined by wheat is just determined by everything else and the price of all those things are up. You know, it's interesting.

Another theme that continues to emerge is how bifurcated or how fragmented a lot of these markets are. And so, you know, as Scott mentioned, in the U.S., we might be in decent. shape from a fertilizer perspective. It might be tight. It might be a little bit more expensive. Whereas for a country like Brazil, which he noted is extremely reliant on imported potash, that could be a totally different story. Of course, it would all come back around and connect and then you'd have global prices. But it is interesting to think about, you know, the U.S. relatively insulated on a number of these things compared to lots of other countries,

whether they be producers or consumers of grain. Well, also the point about certain countries that rely a lot on food imports, now being most vulnerable to all of this. And I know Egypt is the one that was mentioned a number of times, but of course there are others. And when it comes to food price inflation, this is something we've discussed again. But that is clearly a really sensitive topic for consumers and people who have to eat. And it's the kind of thing that tends to explode into the political sphere very quickly as well. So I think I very briefly mentioned the Egypt bread riots.

I think that was back in 2008. I mean, some people talk about those as a sort of prelude for the Arab Spring entirely. So it's very easy to see food price pressures translate into political upheaval as well. Last point, though, it'll be interesting if the White House does anything on those millions of acres that are currently held back. I didn't realize that previously that we have this equivalent of essentially, it's not quite a strategic patrol. It's not quite the equivalent of a strategic petroleum reserve because there's nothing to sell into the market immediately. But to make them make those acres available for planting, I don't know, it doesn't feel like

wheat politics create havoc for the White House the same way gasoline prices do. But it will be interesting to see if that lever or something similar is pulled at some point. Well, also Scott's point about, you know, even if you just did something relatively small and it's probably not feasible that releasing those reserved acres would suddenly lead to a big boom in supply. But even something small can send a price signal to the market and start bringing them down. Particularly at a time when countries are hoarding. And so if there's a lot of excess buying because everyone is nervous and you're signaling to the market, okay, supply is going to come in September or whenever that comes, that might ease some of the current hoarding now and be able

to have a response even before the weed is actually, or whatever grain it is, is actually grown. Yeah, it's an interesting one, although maybe the pheasant hunters will get upset. I don't know. How large is like the pheasant hunting lobby? It'll be really bad if we have to like, like we're not going to do a pheasant hunting. I mean, what if it gets to that point? We're like, well, now we have to do a pheasant hunting story. But we'll know it's really bad if that's where we have to keep going down that round. Yeah, all right.

Shall we leave it there? Let's leave it there. Okay, this has been another episode of the Alld Lots Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our guest, Scott Irwin on Twitter.

He's at Scott Irwin U.I. Big thanks to our producers, Magnus Henrickson and Colin Tipton. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases.

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