Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How Corn Ethanol Is Driving a Surge in Fertilizer Costs
Transcript
- Lucas: Corn is on a tear. Seven-point-three percent in five days, closing yesterday at four fifty-nine a bushel. That's the kind of move that gets your attention. Luna: It's not just corn either — wheat is up nearly four percent, cotton up almost five. But corn is the one that really jumps out to me. Lucas: Right, and the question is why. The conventional story is supply concerns — we've had some weather issues in the Midwest, and there's always the geopolitical overlay. But look a bit deeper and there's a really interesting input-cost story unfolding. Luna: You're thinking about fertilizer, aren't you? Lucas: Exactly. Corn is the most fertilizer-intensive crop we grow. And the main input for nitrogen fertilizer is natural gas. Natural gas has been getting crushed — down four and a half percent this week, trading at two eighty-eight per MMBtu. But that's a short-term move. Over the past year, nat gas has been highly volatile, and fertilizer prices have lagged. Luna: So you're saying the recent rally in corn might actually be a signal that farmers are expecting higher input costs and planting more corn to capture the price? That's kind of circular. Lucas: It is circular, and that's the whole point. Higher corn prices incentivize more corn acres, which increases fertilizer demand, which pushes up natural gas demand, which eventually feeds back into higher costs for corn. The loop is tightening right now. And it's not just an agricultural story — it ripples into inflation. Luna: Well, and we just got the CPI print for May — the headline CPI at 334, up from 332.41. Food inflation is a big part of that. If corn costs more, everything from livestock feed to ethanol to high-fructose corn syrup gets more expensive. Lucas: Speaking of which — if this episode is making you think about how these commodity loops actually work, and you find that useful, this show stays ad-free because of listener support. If you'd like to help keep it that way, you can find us at buy me a coffee dot com slash fexingo. No pressure, but it does make a difference. Luna: Yeah, it's a great way to support the kind of deep dive we do. And honestly, the economics of fertilizer is one of those topics that touches everything. Lucas: So let's unpack that loop. The key number is that about sixty percent of the cost of producing nitrogen fertilizer is natural gas. When gas prices fall, fertilizer producers get a margin boost — but they don't always pass it through immediately. Right now, we've seen nat gas drop sharply from the highs earlier this year, but retail fertilizer prices haven't fully adjusted. That suggests there's either a lag or some stickiness. Luna: And stickiness can be a problem for farmers. If they locked in fertilizer at higher prices earlier in the season, they're still paying those costs even as corn rallies. So the margin squeeze might actually be worse than it looks. Lucas: Exactly. That's the hidden variable. We have corn at four fifty-nine, but the cost to grow an acre of corn this year, depending on the region, is probably north of seven hundred dollars. Fertilizer is a huge piece of that. So the net return to the farmer isn't as rosy as the futures price suggests. Luna: And then there's the ethanol angle. Corn is the primary feedstock for U.S. ethanol, and with the Biden administration's push for higher blending mandates, demand is structurally there. But ethanol margins are also tied to gasoline prices, which are tied to crude. And crude is up eleven percent this week on the Strait of Hormuz tensions. Lucas: That's the geopolitical overlay. Brent crude at eighty-five eighty-two, up twelve and a half percent in five days. The headlines this morning are about U.S. strikes on Iranian assets and the Hormuz toll plans. That puts a risk premium on all energy — including natural gas, even if nat gas itself isn't directly in the line of fire. But the indirect effect is higher input costs for fertilizer, which feeds back into corn. Luna: So we've got this three-legged stool: corn, natural gas, and geopolitics. And all three are moving in ways that reinforce each other. Lucas: Right. And here's where it ties to the broader economy. The core PCE price index came in at 130.1 in May, up from 129.67. That's still above the Fed's target. Commodity price pressures like this make it harder for them to ease off. If corn and fertilizer costs keep pushing up, food inflation stays sticky. Luna: And sticky inflation means the Fed stays hawkish. That's not great for growth, but it's a tailwind for commodities like gold. Except gold has been sliding — down two point three percent this week to just over four thousand. That's interesting. Lucas: Gold is being pulled in two directions. On one hand, geopolitical risk should boost safe-haven demand. On the other, the dollar has been strong, and real rates are still elevated. And gold doesn't have the same input-cost story as corn. It's a monetary metal, not an industrial one. Luna: So while gold is stagnating, copper is up two point six percent to six thirty-eight. That's more of a growth signal — copper is 'Dr. Copper' for a reason. Lucas: Absolutely. Copper is saying global demand is still there, especially with China exports surging. China's June exports rose at the fastest pace since 2021, driven by the AI boom and tariff front-running. That's a lot of copper going into electronics and infrastructure. Luna: But the tariff piece is interesting. If companies are rushing to export before tariffs hit, that's a one-time boost. It doesn't necessarily signal sustainable demand. Lucas: Good point. And that's the kind of nuance that gets lost in the headline numbers. The same dynamic is playing out in agriculture. The corn rally might be partly a preemptive move — farmers and traders pricing in potential disruptions to fertilizer imports from the Middle East, or just hedging against more volatility. Luna: So where does that leave us? If you're a farmer, do you lock in fertilizer now or wait? Lucas: That's the million-dollar question. With natural gas at two eighty-eight, it might be tempting to wait for cheaper fertilizer. But if tensions escalate, gas could spike, and fertilizer prices would follow. The risk is asymmetric. Luna: And if you're an investor looking at fertilizer stocks? The XLE is up three point eight percent this week, but that's energy broadly. There's a specific fertilizer ETF — but it's not in the data we have. Still, the correlation is clear. Lucas: Let's zoom out. The ten-year breakeven inflation rate is at two point two six, up from two point two four. That suggests the market expects inflation to remain above the Fed's target. Commodities like corn and fertilizer are part of that story. But so is energy, and so is labor. Luna: And that's the thing — it's never just one commodity. The loops interconnect. Corn and natural gas and geopolitics and monetary policy all feed into each other. Lucas: That's why we do this show. To trace those connections. Today, the big takeaway is that corn's rally isn't just about weather or supply — it's about the input-cost loop that ties it to fertilizer and natural gas, and the geopolitical risk that could amplify everything. Luna: So watch the Hormuz headlines, watch the nat gas inventory reports, and watch the USDA acreage updates. That's where the next move in corn will come from. Lucas: Exactly. And on that note, we'll be watching right along with you.