Petroleum in Food – Can You Eat It?

Interesting question that one would have no hesitation in answering in the affirmative and clearly. nope
So yes in the first degree, don’t hesitate to try.
And yet, we shall see, we must not go so fast. And for that we will argue with the bread.
Baking bread requires water, flour and energy. And what interests us is not the energy, even if it is needed, nor the almost free water, but the flour.

Yes, because to make flour you need wheat. And to make wheat you need… ?

The graphic that makes you think:

To produce wheat, you need soil, seeds, water… and most importantly, you need fertilizers.
Above the price of the main fertilizer used worldwide and the oil needed to buy it. The urea. Urea explodes this year 2021. It’s times 2.5. So not as much as petrol in Europe, of course, but still. And what interests us. Oil is relatively expensive, about 8 standard deviations above its average price since 1983. Strangely, it even expects higher prices. It can be difficult to tell from a low fertilizer supply. Definitely see the movement. The ratio is relatively stable and there is a strong correlation with oil, especially in bullish phases.

Below are the three main fertilizers used around the world: potash, phosphate and the most common nitrogen.

main fertilizer

The cost of fertilizers in 2020 averages $45 per acre in the United States versus $135 for wheat production. In addition, there are $16 and $12 in chemical products, most of which are undoubtedly derivatives of oil and electricity or heating oil. To put it simply, around half of the costs are directly related to energy, 90% of which is definitely oil/gas.

wheat cost

And without fertilizer we could not eat. Improved agricultural yields are largely due to fertilizers. Of course there are other factors. But fertilizer is important. hunger kills.

corp earnings

Why is fertilizer made up of 90% oil or gas?
Because it is the result of several reactions, which have in common that energy is required in the form of gas or oil.

Ammonia is required to produce urea, and nitrogen and hydrogen are required to produce ammonia. In order to produce nitrogen, you need liquid air. And for hydrogen you need gas energy. Liquid air also takes a lot of energy because you have to compress the air and then distill it.

Ammonia production alone accounts for 1 to 2 percent of global energy consumption and between 3 and 5 percent of gas consumption. In any case, very simplistically, we can say that in the end we get N, O, H, it’s free, but O – H2N-NH2 costs a lot of energy.

For example, the price of oil and gas directly affects the price of grain. The farmer is faced with the dilemma that he has to reckon with higher costs as a result, but does not have the certainty of recouping the investment. Wheat forward prices 6 months from now don’t really reflect the cost of fertilizers. He then has 3 options. Plant less, replace his cost, plant the same amount because he can, and stop because he’s betting prices will go higher or that he can’t lower his prices. In any case, this leads in principle to higher prices for wheat and thus ultimately for bread, if the oven in particular is operated with French electricity.

So how much more expensive are we in a long-term uptrend? To do this, you need to look at other variables such as B. View stock levels. In principle, there is not too much to worry about. Global grain stocks are not particularly low.

FAO World Cereal Stocks

However, there are patterns to follow, such as with wheat in the US. As can be seen from the chart below, inventories are particularly low by historical standards and the forecasts are not good.

USDA WHEAT tailstock

According to the FAO, grain stocks are also tending to decline

Global inventories

So we will pay attention to the following point, the balance of trade in agricultural products is clearly unfavorable to Asia. We can talk again about the pork crisis in China, which has led to very strong tensions in soybeans.

ImportExportBalances

Finally, the question we always ask ourselves is what to buy to benefit from this analysis. Namely, that the consumption of food will not decrease*, that the yield depends largely on fertilizers, which themselves are practically just energy in the form of gas and oil, and whose price passes directly to the consumer. We can take a close look at American giants like ADM or Bunge. But also Nutrien or Covetra. The Ishare agribusiness offers a whole range of interesting names. And it’s not particularly expensive. However, in a market downturn, it would be better to wait, but the recovery will certainly be faster in agribusiness.

ADM vs SP. ADM not particularly expensive.

AdmSP

In summary, oil is not eaten, after all it must be avoided, we really find it in many foods in a direct way and as a thing. I invite you to see for yourself. It is no joke. But most importantly, let’s remember that it takes a lot of energy to grow the crops that feed the planet. The height is finally putting a little in the engine of his car…

*Consumption of wheat and corn worldwide since 1994:

World of wheat corn consumption

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