Market Thinking

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The Third Horseman

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The arrival of War so soon after Pestilence or Plague has unsurprisingly led many to speculate (some idly, others determinedly) as to whether the Third of the Four Horseman of the Apocalypse is due soon. That one of course is Famine. Such speculation has been fuelled by the co-ordinated attempts coming out of Davos last week to blame Russia for an upcoming food shortage.

OK, Plague, then War. Famine? You’re up

The Four Horsemen of the Apocalypse, 1937 - Werner Peiner
Werner Peiner, 1937 WikiArt

It is not in any way to excuse Russia for the War in Ukraine that we need to point out that, while the threat of serious shortages, if not outright Famine, is very real indeed, it is only peripherally due to a the current lack of Wheat shipments out of Ukraine. Indeed, as one commodity specialist pointed out recently, the only way the Royal Navy could actually help right now would be is if they set up a Marine Insurance division, for it is the lack of insurance, as well as the Ukraine mines in Odessa, that is actually the problem. In terms of who might be affected most by Ukraine blockages, rather than self imposed sanctions on Russia, we have reproduced the useful infographic we got from AL Jazeera back in early March (see Ukraine and the Markets). A quarter of the world’s Wheat Exports come from Russia and Ukraine, making Ukraine a little under 7%.

While the missing Wheat is undoubtedly going to be a problem, especially in the Middle East, the serious risk of Famine is far more to do with (yet another) consequence arising out of the series of catastrophic policy failures enacted over recent years in the Energy and Farming space that we might broadly link up as being part of the Green Industrial Complex, or as we now like to call it, “The Green Leap Forward”.

Ukraine provided a little under 7% of World Wheat exports in 2019, the real threat of Famine comes from the confused policies of the Green Leap Forward

It was said at the time that Covid 19 and the associated policies acted to accelerate change and highlight problems already existing, particularly around the Globalised Supply Chain. The same is true of the War in Ukraine, which has further disrupted supply chains but also highlighted the quasi economically suicidal policies being driven by the environmental lobby worldwide. The decisions to sanction Russia have thus only compounded problems that were already in place. To get out of this mess requires not only an end to war (and sanctions) but also a rethinking of the whole area of ‘renewable energy’. As the ESG crowd are finding out, virtue signalling is not cost free, these policies have real world consequences and those proposing them need to be accountable.

For example, while most people tend to think of the main role of Natural Gas as being to provide a cleaner source of energy for power generation as well as being the only realistic source of base-load energy for renewables (which of course are inconsistent in their ability to generate power, especially in Europe), they have many uses in Agriculture which are only just being recognised in the wider world – including evidently amongst policy makers. Natural Gas is a key component in the production of fertilisers for example, but also in the production of pesticides, the prices of both had been soaring well before the War in Ukraine.

Then there is the role of diesel. Natural gas is also used in the production of the Hydrogen used to remove sulphur from diesel, as required by regulations, thus contributing further to the shortage of diesel fuel, shortages that have in turn been compounded by the closing down of a number of refining plants, largely on environmental grounds. Now of course, sanctions on Russian Crude are disrupting existing refineries; the ability to switch inputs is far more complicated than the signing of an executive order. As with so much right now, we have evolved incredibly complex eco-systems and messing with one part for political reasons is having myriad unforeseen consequences. Unforeseen by most of the politicians and bureaucrats that is.

Macro investors and policy makes may be watching the price of Crude Oil and take false comfort that it remains reasonably stable despite the War, but the price of refined products has gone up dramatically since February. In the US, Ultra Low sulphur diesel is up 70%, while Jet Fuel is up 130%. Diesel of course is used in the transportation of almost everything and is a major driver behind the surge in prices.

To look at this perfect Green Storm engulfing Agriculture, we have the surge in the price of diesel to operate the machinery, gas, including propane to dry crops, potassium, nitrogen and Urea to fertilise and to provide pesticides. We then add in millions of acres taken out to provide Ethanol and now bio-diesel and the newer practise of growing Soya for ‘renewable diesel’ and utilising other edible oils for biofuel. We are literally burning our food to make expensive fuel while leaving the cheap fuel in the ground. Of course there is also the fact that we need to use a lot of fuel, fertiliser and pesticides to ‘grow’ all this fuel in the first place. Before not eating it.

Back in 2007-8, the Arab Spring was said to have arisen from discontent caused by Food Shortages and with issues such as the Grand Ethiopian Renaissance Dam due to open next year and threatening the supply of water to the 100m population of Egypt (but its OK, because it produces clean energy), this could be a double source of unrest. Not that we are blaming Ethiopia, rather the dogma that would deny them capital to provide any other source of electricity at all simply because it would be of the evil coal fired variety. Stick to burning wood instead.

Hanlon’s Razor says not to attribute to malice what can be more easily explained by stupidity (or incompetence), but rather like the shortage of truck drivers in the UK, or the inability to unload containers in Los Angeles that came at the same time as the global supply chain problems and the sudden shortage of CO2 in the freezing and chilling part of the distribution industry last autumn, when we look at this inter-connected list of policies whereupon government policies and Green Energy projects not only increase the price and instability in energy itself, but also represent a set of serious challenges to the existing food industry we have to wonder if we really can be that incompetent?

In the meantime, Agribusiness is doing well, as are gas companies, Oil Refiners and anyone being threatened with sanctions that are simply raising margins. As well of course as everyone involved in the Green Industrial Complex.

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