Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Fertilizer Prices Are Falling in a Stagflation Era
Transcript
- Lucas: So urea prices are down something like thirty percent from their peak last year, and potash is off even more. That's the kind of number that usually makes people cheer, but in a stagflation environment it's a little more complicated. Luna: Right, because cheaper fertilizer sounds like good news for farmers and maybe even grocery shoppers. But I bet the chain from that to your supermarket shelf is longer than you think. Lucas: Exactly. Let's start with the basics. Urea is the most common nitrogen fertilizer in the world, and its price has been on a rollercoaster. After spiking in 2022 on the back of the Russia-Ukraine war and energy costs, it's been sliding. This month, we're seeing spot prices around three hundred dollars a tonne, which is down from over four hundred a year ago. Luna: And potash is down even more, right? I saw something about Canadian producers expanding. Lucas: Yeah, potash has fallen from about eight hundred dollars a tonne to under five hundred. A big part of that is new supply coming online in Canada and also in the Middle East. The Mosaic Company and Nutrien have both been ramping up production, and there's a new mine in Morocco that's adding pressure. Luna: So what's driving the drop? Is it just supply, or is demand weak too? Lucas: Both. On the demand side, grain prices have been soft. Corn and wheat are down from their peaks, so farmers are planting less and using less fertilizer per acre. And energy costs have eased too, which matters because natural gas is the main input for nitrogen production. So the cost to make urea has come down, and that's passed through to prices. Luna: That makes sense. But here's the thing I keep coming back to: if fertilizer is cheaper, why is my grocery bill still going up? The CPI data we just saw shows food prices still rising, even if the headline number is moderating. Lucas: That's the million-dollar question. The first thing to remember is that fertilizer is a small share of the cost of a loaf of bread or a pound of beef. Most of what you pay at the store is labor, packaging, transportation, and energy. So a big percentage drop in fertilizer is maybe a few cents on a four-dollar loaf. Luna: But over time, shouldn't it feed through? I mean, if farmers are paying less for inputs, eventually that should show up in wholesale prices, right? Lucas: It should, but there's a lag. Farmers buy fertilizer months before they plant, and livestock producers feed costs are even more delayed. So the cheaper fertilizer we're seeing now will mostly show up in food prices next year, not this month. And even then, retailers are slow to pass on declines. They've been burned by inflation, so they're holding onto margins. Luna: So it's not just a pass-through problem, it's also a margin story. That's interesting because it connects to the broader stagflation picture. We've got inflation running above target, growth slowing to one and a half percent annualized, and the Fed stuck. Does cheaper fertilizer actually help the economy, or is it just noise? Lucas: I'd say it's a genuine bright spot, but a modest one. For farmers, it's a real relief on their bottom line. Their margins have been squeezed by high input costs for the past few years, and this gives them a bit of breathing room. That's why we're seeing farm income forecasts stabilize, even though grain prices are weak. Luna: And it could be a small disinflationary force. If food prices moderate next year, that helps the Fed get inflation down without having to keep rates higher for longer. Lucas: Right, and that's actually a key point. In a stagflation environment, you're looking for any supply-side relief you can get. Lower fertilizer costs are exactly the kind of thing that can ease inflation without killing growth. It's not a silver bullet, but it's a tailwind. Luna: Speaking of tailwinds, you mentioned the Middle East. How much of this is geopolitics? We've got sanctions on Russia, trade tensions with China, and now this Canada-U.S. spat. Does fertilizer get caught up in that? Lucas: It's a double-edged sword. On one hand, the sanctions on Belarus and Russia have rerouted potash flows, and that's created opportunities for Canadian producers. On the other hand, any escalation in trade wars could disrupt supply chains again. We saw that in 2022, and it's a risk that's still on the table. Luna: So we're not out of the woods. But for now, the market is saying there's enough supply to go around, and prices are reflecting that. Lucas: Exactly. And this is where the bond market connection comes in. Treasury Secretary Bessent has been talking about buying back government debt, and there's chatter that he could tap nearly a trillion dollars in the Treasury General Account to fund that. It's a controversial move, and it's got people like Stanley Druckenmiller skeptical. But it also has knock-on effects for commodities. Luna: How so? Lucas: If the Treasury is buying back bonds, that's effectively injecting liquidity into the system. It can push down long-term yields, which weakens the dollar. A weaker dollar makes commodities priced in dollars, like fertilizer, cheaper for foreign buyers, and that can boost demand. So you get a subtle tailwind for agricultural exports. Luna: Interesting. So Bessent's bond gambit could indirectly support fertilizer demand. That's a twist. Lucas: It's one of those things that's hard to quantify, but it's part of the backdrop. The bigger picture is that fertilizer prices are telling us something about the global economy: supply is catching up with demand, and that's a disinflationary signal. In a world where inflation is sticky around three percent, any source of relief is welcome. Luna: And for the listener who's trying to make sense of their own grocery bill, the takeaway is that cheaper fertilizer today means cheaper food tomorrow, but not by much, and not for a while. Lucas: Right. And it's worth remembering that the food CPI is still rising, but at a slower pace. The latest data shows food prices up about two percent year-over-year, which is down from the peaks of 2023. So we're seeing some of that pass-through already, just slower than you might hope. Luna: If walking through the economy with us has made something click for you, a couple of dollars a month is genuinely what keeps these episodes going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it's listeners like you who keep this ad-free and independent. Every bit helps, and it's really appreciated. Luna: So let's get back to the lag question, because I think that's the practical thing people can wrap their heads around. You said it takes about a year for fertilizer prices to show up in retail food. Is that a rule of thumb, or does it vary a lot? Lucas: It varies by product. For crops like corn and soybeans, there's a clear seasonality. Farmers buy fertilizer in the spring, plant, harvest in the fall, and then the grain gets processed and shipped. So you're looking at nine to eighteen months from the field to the shelf. For livestock, it's even longer because you have to feed the animals before they become meat. Luna: So the cheaper fertilizer we're seeing now might land on shelves in late 2027. That's a long wait for consumers who are still feeling the pinch. Lucas: It is. But it's also why you have to be careful about reading too much into single-month CPI prints. The inflation we're seeing today is partly a reflection of cost pressures from a year or two ago. And that's exactly why the Fed is so focused on expectations — if people think prices will keep rising, they behave in ways that make it self-fulfilling. Luna: So in a way, cheaper fertilizer could help anchor expectations. If consumers see food prices stabilizing, they might not demand such big wage increases, and that helps break the wage-price spiral. Lucas: Right, and that's the silver lining. We talked about wage growth not turning into a spiral in a previous episode, but this is another piece of the puzzle. Lower input costs give businesses less reason to raise prices, and that can take the edge off inflation expectations. Luna: Let's zoom out for a second. We're in a period where the stock market is flat, gold is up four and a half percent on the week, and the bond market is signaling that the Fed might actually cut rates next year. Does the fertilizer story fit into that narrative? Lucas: I think it fits perfectly. The market is pricing in a soft landing, or at least a mild recession, and falling commodity prices are a piece of that. If fertilizer is cheaper, that's a sign that global demand is soft and supply is abundant. It's consistent with a world where growth is slow but inflation is gradually coming down. Luna: And gold rallying is the other side of that — investors hedging against the risk that the Fed cuts too late and we get a real downturn. Lucas: Exactly. So you've got this tug of war between disinflationary forces like cheaper fertilizer and inflationary risks like the Treasury's bond-buying experiment. The next few months will tell us which one wins. Luna: So if you're a farmer, this is good news. If you're a consumer, it's a slow burn. And if you're an investor, it's one more signal that the economy is cooling but not collapsing. Lucas: That's the takeaway. And on that note, let's leave it there for today. Thanks for listening, and we'll see you next time.