Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Geographic Rebalancing of Food Production
Transcript
- Lucas: So the May core CPI reading came in at 3.4 percent — highest since October 2023. And the response from most financial commentary has been the same script: the Fed is stuck, services inflation is sticky, et cetera. But there's a structural shift happening underneath that headline number that I think is more interesting than the usual debate about whether the Fed should cut in September. Luna: Alright, I'm listening. What shift? Lucas: The geographic rebalancing of food production. And I don't mean the obvious stuff — reshoring semiconductor fabs or bringing battery manufacturing back from Asia. I mean where we actually grow the crops that end up in the grocery store. It's happening quietly, but the numbers are starting to show a real pattern. Luna: You're talking about moving food production around domestically, not just nearshoring to Mexico or something? Lucas: Exactly. And it's driven by the specific combo of high input costs and persistent inflation that we've been talking about on this show since — well, since forever. Let me give you a concrete example. California's Central Valley has been the dominant source of fresh produce, rice, and nuts for decades. But input costs there — water, fertilizer, labor — have climbed so fast that the cost per acre for something like rice has gone up about 40 percent since 2020. Meanwhile, the price farmers can get at wholesale has lagged. So acreage in the San Joaquin Valley for rice has dropped by about 11 percent since 2022. Luna: Eleven percent drop in three years. That's not marginal. Where's that production going? Lucas: Back to the Mississippi Delta and the Arkansas Grand Prairie. Those regions have cheaper water access, lower land costs, and — this is key — more stable labor availability. The shift is small in absolute terms, but it's accelerating. Arkansas rice acreage is up about 6 percent over the same period. And it's not just rice. The same dynamics are playing out for tomatoes, lettuce, and tree nuts. Luna: So what you're saying is that stagflation — high inflation plus slow growth — is essentially pricing California out of its historical comparative advantage in certain crops. Lucas: That's exactly it. And the interesting thing is, this isn't driven by tariffs or trade policy. It's purely a cost of production arbitrage playing out within US borders. In a lower-inflation environment, California's yield advantage — which is real, they get more per acre — offsets the input costs. But when input costs are rising at double the rate of output prices, that equation flips. Luna: And this matters for the CPI because...? Lucas: Because in the short run, shifting production to lower-cost regions should put downward pressure on wholesale prices. But in the medium run, you're dealing with a transition period where supply chains are being reconfigured. There's friction: new infrastructure, new labor pools, new logistics. That friction itself can keep food price inflation higher than it would be if the system were static. Luna: So we get a sort of inflation floor from the rebalancing itself. That's a really useful way to think about why the Fed's job hasn't gotten easier even as goods inflation has cooled. Lucas: Right. And there's another layer here that I think is even more structural. The same forces that push rice from California to Arkansas are also pushing vegetable production from the Southwest into the Mountain West — Colorado, New Mexico, even parts of Utah. The University of Arizona did a study last year showing that greenhouse vegetable capacity in Colorado has increased by 15 percent since 2022. That's almost entirely high-tech, climate-controlled production aimed at replacing open-field growing in California and Arizona. Luna: That's fascinating. So the capital is flowing to regions that were never historically agricultural powerhouses, because the inflation calculus makes it work. Lucas: Exactly. And then you add in the labor market piece. We saw the May jobs report — unemployment steady at 4.3 percent, but factory job cuts in June are nearing levels we haven't seen since the financial crisis and the early pandemic. That's according to S&P data from earlier this week. Luna: Right, I saw that headline. That's a big deal for manufacturing towns, but how does it connect to food production? Lucas: Because the labor being shed from factory floors in the Midwest and the South is partly being absorbed by this expanding agricultural and food-processing sector. The new greenhouse operations in Colorado, the packing plants in Arkansas — they need workers. And they can offer wages that, while still low, are competitive with the declining manufacturing wages in those regions. So we're seeing a rebalancing of labor within the goods-producing economy, not just between goods and services. Luna: So the geographic shift in food production is also a geographic shift in employment. That's a much bigger story than just what's happening in the grocery aisle. Lucas: It is. And it's one of those quiet structural trends that doesn't make the front page because it's gradual and regional. But if you squint, you can see the outlines of a permanently different agricultural map of the United States — one where the Central Valley is less dominant, the Delta and the Plains are more important, and indoor agriculture in the Mountain West becomes a real factor. Luna: Before we go deeper on that, I want to pause for a second. You know, it strikes me that this kind of analysis — specific, grounded, no hype — is exactly why we keep this show ad-free. We don't have to sell you anything, and we don't have to tailor the content for a sponsor. If walking through the economy with us has made something click for you the way it just did for me, and you want to help keep that going, you can find us at buy me a coffee dot com slash fexingo. No pressure, no perks — just knowing that people value the work. Lucas: Yeah, that's right. It's a small gesture that makes a big difference in allowing us to follow threads like this one wherever they lead, without worrying about ad inventory. So thank you to anyone who's already done that. Luna: Alright, back to the map. So if the Central Valley loses 11 percent of its rice acreage, what happens to the communities that depend on that crop? There's a human cost here. Lucas: There absolutely is. And that's the part that often gets lost in the macro discussion. Rice farming in the Central Valley supports thousands of jobs — not just on the farm, but in equipment, processing, transportation. When acreage shrinks, those jobs disappear or move. The question is whether the new jobs in Arkansas and Colorado are accessible to the displaced workers. And the answer is... sometimes. But moving from the Central Valley to the Arkansas Delta is not a trivial thing. Housing costs are lower in Arkansas, but wages are also lower. So net real income might not change much. Luna: And this is where stagflation is especially cruel. The inflation that's driving the geographic shift also eats away at whatever wage gains workers make when they relocate. Lucas: Exactly. Average hourly earnings are at $37.50 — that's up about 4 percent year-over-year. But core PCE is running at 3.4 percent, so the real gain is almost negligible. For a worker moving from California to Arkansas, the nominal wage might drop from, say, $22 an hour to $18 an hour. That's a 18 percent nominal cut. Even with lower housing costs, they're probably worse off in real terms. Luna: So the rebalancing helps the macro inflation picture — maybe — but it hurts the micro household picture. That's a tough trade-off. Lucas: It is. And it's the kind of trade-off that central bankers don't talk about. They look at aggregate price stability, but the mechanism for achieving it can be quite painful for specific regions and workers. This is why I think the stagflation framework is so useful — it forces you to consider both the inflation and the growth sides simultaneously, and how they intersect at a granular level. Luna: Let's zoom back out for a second. We've talked about rice and vegetables. Are there other crops where we're seeing a similar pattern? Lucas: Dairy is another one. The traditional dairy belt — Wisconsin, Minnesota, upstate New York — has been losing share to new operations in Texas and New Mexico, where land is cheaper and the climate allows for larger, more efficient barns. But the twist with dairy is that feed costs — corn and soy — are also subject to the same input cost pressure. So the shift is more complex. Some operations are moving to be closer to feed sources, which is why you're seeing dairy expansion in Nebraska and Kansas. Luna: Interesting. And corn and soy themselves — are those shifting? That would be huge. Lucas: Less so, because those are commodity crops with deep infrastructure already built around them. But there is a subtle shift toward more drought-resistant varieties being planted farther north — in the Dakotas and even into southern Canada — as the climate warms and input costs make irrigation uneconomical in drier regions. That's a slower trend, but it's there. Luna: So the geographic rebalancing is really a multi-crop, multi-region phenomenon. And it's being accelerated by the stagflation environment we're in. Lucas: Exactly. And I'd argue it's one of the most underappreciated structural shifts happening in the US economy right now. For anyone trying to understand where inflation is headed over the next three to five years, you can't just look at the Phillips curve or the output gap. You have to look at where food is going to come from, and how much it will cost to get it there. Luna: And on that note, we're going to keep following this thread in future episodes. Thanks for listening.