As you know, we have been paying a lot of attention to inflation behavior. We have already been warning how the FAO index of food prices is now surpassing where it stood 10 years ago. In fact, in real terms, that index is now even at the peak witnessed in the mid 1970’s, (listen to the podcast here.)
Today’s release of the February 2022 increase of the index is a major source of concern. It has gone up by 3.9% compared to January. This is a very violent monthly increase. The last time it had such a surge was in May 2021 when the monthly increase was at +4.9%.
Needless to say that countries with a high external dependency on food and energy will suffer the most. According to the World Bank trade statistics, Ukraine’s share of supply to the world regarding essential products such as cereals or vegetable oils represents respectively between 6% and 7%, enough to cause a major surge on world markets. Russia is the 3rd major player in oil and natural gas markets.
All these disruptions in supply of energy and food will cause an unwelcome adverse effect, right when most vulnerable countries are still facing the effects of the sanitary crisis.
All the signals are extremely alarming; as of yesterday, wheat prices on the futures markets was 76% higher than a year ago, corn was 38% higher than a year ago, soybean was 19% higher than a year ago. In fact, wheat prices jumped by +40% in just one week.
Meanwhile, the following stocks gained as follows during the same period in the last 12 months; +49% for Archer Daniels Midland, +42% for Bunge, and a similar appreciation from stocks in the supply chain players.
We have to take a step back and analyze this situation by asking ourselves about the periphery of that particular situation. I am always inspired by the philosophy of native american friends. I was one day watching the sky in Arizona, and my great friend and teacher was telling me that the best way to see the 7 Sisters (also known as the Pleiades) with the naked eye, without the use of a telescope, is to never look straight to the 7 stars, but on the side, next to them. If you look at them directly, you will not see them. They will look blurred to the naked eye. That’s how you can see them. So I invite you to analyze the current situation by looking at the periphery.
Let me know what your thoughts are by leaving a comment. I will reply.