Last week, European Commission President Ursula von der Leyen announced a proposal for the European Union (E.U.) to phase out Russian oil imports over the next six months.
It’s part of the E.U.’s harshest sanctions package against Russia yet.
The E.U. gets roughly a quarter of its oil and 40% of its gas from Russia. So this embargo could have a significant impact on fuel supply and prices in Europe.
But it will also have a knock-on effect on fuel and energy prices globally. That’s because Russia accounts for 10% of the world’s oil. And it is the world’s largest gas exporter.
Now, here in the U.S., energy prices are already up 32% year on year. That’s according to the March Consumer Price Index (CPI) data released by the Bureau of Labor Statistics.
If you look even closer at those figures, you’ll see gasoline is up 48% in the last year. And fuel oil is up a whopping 70%.
And if that E.U. proposal is accepted, we can expect fuel and energy prices here to shoot even higher.
The World Bank expects global energy prices to go up more than 50% in 2022.
But that won’t just drive up the cost of filling your car or heating your home…
Rising fuel and energy costs have much bigger consequences…
In fact, as I’ll show you today, the amount you spend putting food on the table is closely linked to the cost of energy…
And that means you may have to look for further economies in your monthly household budget again if the E.U. ban goes ahead…
The Link Between Energy and Food Prices
Now, when most folks think about fuel and energy price increases, they don’t think about the impact this will have on their grocery bill.
But food and energy prices go hand in hand. Take a look at the chart below. It shows global food and oil prices over the last three decades…
As you can see, the two are closely linked. In fact, over the last decade, they have moved practically in tandem.
And it makes sense. It takes energy to produce food.
You see, most components needed to produce the world’s food supply rely heavily on fossil fuels.
Oil is used to make pesticides and food packaging. And natural gas is used to make fertilizer. Both are used to generate electricity for the food production industry.
You also need energy to transport food to the store. Trucks and trains run on diesel; planes run on jet fuel. There are literally millions of them crisscrossing the nation each day to get produce to market.
So, when energy prices go up, food gets both more expensive and less abundant.
Producers pass on their rising energy costs. This results in higher prices. So consumers look at alternatives to cut down on their grocery bills.
In response, producers reduce their output. This leads to shortages, which drive prices up even further.
That’s why when the price of energy rises, the price of food rises along with it.
In fact, research has shown that more than 60% of the variance in food prices is explained by oil price movement.
Food Prices Already at Record Highs
Even before Russia’s invasion of Ukraine, prices were tearing higher as the world opened up after the 2020 lockdowns.
Here in the U.S., energy prices are up 32% over the past year. And the cost of food at home is up 10%.
But energy and food prices have spiked even more since Russia started a war in Ukraine.
U.S. energy prices increased 11% from February to March 2022. And the cost of food at home rose by 1.5%.
In fact, according to the United Nations’ Food and Agricultural Organization (FAO), world food prices are at their highest level in decades.
In this next chart of the FAO Food Price Index, you can see that they are now higher than they were in the mid-1970s…
Let’s take a quick look at that historical context…
From Oil Shocks to Food Shortages
The fact that the last spike of this magnitude in food prices occurred during the oil crisis in 1973-1975 isn’t a coincidence.
That oil crisis began when the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an embargo on oil exports.
The embargo was targeted at nations that had supported Israel during the Yom Kippur War against the Arab states… most notably, the United States, Japan, and Western Europe.
The resulting 1970s Oil Shock knocked the wind out of the global economy. The price of oil went up nearly 300% globally. It set U.S. inflation soaring to above 11%.
And this led to food shortages. For example, there was a scarcity of bread in 1974, salt in 1975, and bread again in 1977.
Today’s parallels with the 1970s oil shock are unmistakable.
We have a war raging in a geopolitically important region. Oil is up 36% so far this year. U.S. inflation is out of control.
And now, you have talk of an E.U.-wide oil embargo. If it gets voted into law, we could see substantially higher energy prices over the coming months.
And that will push up food prices, too.
Food Shortages on the Horizon
Today’s energy crisis hasn’t resulted in food scarcity or empty shelves, yet. But those could be on the horizon.
Speaking at a news conference in Brussels (the headquarters of the E.U.) recently, President Biden touched on the potential for food shortages.
He said that they are “going to be real […] because both Russia and Ukraine have been the breadbasket of Europe in terms of wheat, for example.”
But it’s not just Europe that will feel the pinch…
Russia and Ukraine account for nearly one-third of the world’s wheat supply. And they produce 19% of the world’s corn.
Also, Russia is the fourth-largest producer of fertilizer (something I’ll return to in tomorrow’s essay). And Ukraine is the largest producer of sunflower oil, a key ingredient in lots of foods, followed closely by Russia.
The World Bank says food prices will soar by more than 20% this year.
Here in the U.S., the Department of Agriculture’s Economic Research Service says poultry prices are predicted to increase between 7.5% and 8.5%. Dairy products and egg prices will go up between 6% and 7%. Fish and seafood will increase between 5% and 6%.
As I wrote about recently, the war in the Ukraine is intensifying the raw material shortages and supply chain issues the world was already experiencing as an after-effect of the pandemic.
Now, with this added pressure from potential oil embargoes, food prices will likely keep rising through this year.
The Bottom Line
I know, this all sounds grim. Especially if you’re also looking at your investment portfolio taking a beating…
So, what can you do?
Unfortunately, cutting back on grocery bills is easier said than done. No matter how you slice it, we all need to feed ourselves and our families.
Buying food in bulk to lock in discounts is one option. As is considering a Costco or BJ’s membership, which can help save on food and fuel costs (if your car runs on gas).
But you can also try to make some of that money back in the financial markets.
One of the best ways to do that right now is with the Invesco DB Agriculture Fund ETF (DBA). This exchange-traded fund (ETF) includes wheat, corn, soybeans, and other food staples.
The reason I like this ETF is that it’s made up of futures, not companies, in these areas. This means it captures more isolated price movements compared to companies that may use or produce these products.
And it’s not physically backed by the individual components. So it doesn’t incur storage costs, which can get passed on to investors.
All this could make it an attractive alternative to stocks to further diversify your portfolio and risk.
We first recommended DBA two months ago. Since then, it’s down about 2.5%. But the S&P 500 is down more than 4% and the Nasdaq is down 9% over the same time.
And DBA’s overall trajectory remains positive. It’s up about 10% over the last six months. Meanwhile, the S&P 500 is down 14% and the Nasdaq is down 26%.
So DBA is proving to be an excellent hedge against a struggling stock market.
If anything, the recent pullback makes for an excellent buying opportunity.
Happy investing, and I’ll be in touch again soon.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
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