Five months ago, I wrote an article that said the inflation problems we are dealing with today are a supply-side problem that the Federal Reserve was not designed to be able to fix.
The Fed’s tools target reducing consumptive demand rather than expanding the supply of products. On top of that, political actions designed to reduce Climate change (100 years from now) are making food supply problems even worse. The combined impact of both the Fed’s actions and climate change politics is the reduction of food supplies and increasing food costs that will persist.
Both the Fed and climate change enthusiasts are well-intentioned, but don’t seem to understand how big a part the global fertilizer market fits into both food supplies and food costs.
How? I think Vaclav Smil said it best in his book, “How The World Works,” when he wrote,”Half of the world’s population could not be sustained without synthetic nitrogen fertilizers.”
And fertilizers are made from fossil fuels.
So to maintain sufficient food supplies and at lower cost, we need available and accessible fertilizer.
But instead, here’s what’s happening.
Rather than expanding current fossil fuel supplies, the current Biden administration is focused on reducing them out of concern for Climate change. What they’re doing is immediately reducing fossil fuel production and fertilizer availability for food production. The current administration has antagonized the energy industry, created obstacles to increasing supply, and damaged cooperative communication with key energy producers. The result is that US energy production is 15-20% less than where it would have been based on 2019/20 pre-Covid trends.
At the same time unplanned circumstances have complicated issues further. The Russian invasion of Ukraine and the impact of Hurricane Ian have and will reduce fertilizer supply even further. This reduces the supply of fertilizer available to farmers today that are needed to feed us from next year’s crops.
Now consider the global politics of climate change. In a blog I wrote in August, I stated the EU, Netherlands, Canada and Sri Lanka were proposing significant reductions in fertilizer or had already tried to do so. The actions are designed to reduce fertilizer use and reduce the release of greenhouse gasses and methane that are said to contribute to climate change. These actions, meant to reduce climate change effects in 50-100 years, will raise food costs almost immediately.
In addition, the USDA announced the Fertilizer Production Expansion Program with $500 million worth of grants for 1) US origin fertilizer production by 2) local and innovative (climate friendly) new businesses to 3) serve local communities. To create a ‘farmers market’ equivalent of local climate friendly and new fertilizer producers.
That all sounds great. But the new grant program won’t materially add fertilizer supply to the market for 3-10 years, if at all.
No one knows how to fix the problem we’re in, but they’re all acting like they do.
As a country, we’re borrowing the $500 million to pay for the fertilizer grants. The deficit increase from borrowing $500 million will add to the inflation problem. And the new program can’t materially increase supplies of fertilizer to impact food inflation for several years. Aaargh.
In my opinion, it would expand supply faster and save millions if the US government collaborated and cooperated constructively with the existing fossil fuel energy industries to increase supplies. And it would be the fastest way to actually reduce immediate food costs and their inflationary impact.
