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By Jacob Asbjornson
The recent drop in fertilizer prices suggest that food inflation should continue to decelerate, and that peak food inflation is behind us.
Over the last two months, we have seen food inflation decelerate alongside declining fertilizer prices. Food inflation, as measured by the Bureau of Labor Statistics, rose 0.60% month-over-month in October, below the 0.78% seen in September. Despite the monthly deceleration, food inflation remains significantly higher than the 0.16% monthly average in 2019 and 0.14% monthly average in 2018. Fertilizer prices, as measured by the Green Markets North America Fertilizer Price Index (GMNAFPI), have seen a nearly 8% monthly decline in both September and October. Given the lag between fertilizer purchases and consumer food expenditures, there is reason to believe that food prices will continue to decelerate over the coming months and into 2023.
One of the main drivers of fertilizer prices is natural gas prices. Nitrogen fertilizer, which is estimated to be required for half of the food produced globally and is the most important nutrient-due to its impact on grain production and feed prices for animal proteins, relies heavily on natural gas. Following Russia invading Ukraine, natural gas prices rose 100% over three months, while the GMNAFPI increased 40% in the month after the invasion. Throughout the summer, fertilizer prices remained volatile and food inflation accelerated.
Since late-August, fertilizer prices are down over 12% and natural gas prices have come off their highs, with the U.S. down 30% and Europe down 60%. Given the rapid decline, farmers may be enticed to buy more fertilizer at current levels given the upcoming planting season. Additionally, grain and corn prices have been flat to slightly up since August, which should further incentivize more production.
A number of other factors are pointing to a deceleration in food prices. For one, the continued strength in the dollar will likely help on both the export and import sides. Despite being the third largest producer of fertilizer globally, the U.S. has historically had to import the three main fertilizer nutrients to meet demand. Additionally, we have seen supply chain relief in the cost of freight and reduced lead times. Although not seen yet, an increased labor supply could be supportive for production and further supply chain normalization. Altogether, the recent decline in fertilizer prices alongside other supporting factors provide compelling evidence that we have seen peak food inflation.
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