A Quick Dive: How are Energy Prices Impacting the Cost of Food?

Updated: Aug 8

This week we take a deeper dive into the relationship between energy and food prices, as both sectors have seen inflation accelerate significantly in 2022.

Global supply chain disruptions, a “hot” labor market, and more recently the Russia-Ukraine conflict are key contributors to rising inflation. This latest issue is especially concerning given how big Russia is in the global chemicals and energy markets.

The Value Chain of Food

I spent the last two years working as an economics research assistant at the University of Wisconsin, where I specialized in the economics of regenerative agriculture. This meant that I studied how food is grown and strategies to make that process more efficient.

For almost all food grown or produced in the United States, the first input is chemicals. These chemicals are either herbicides, mainly derived from petroleum, or fertilizers, such as nitrogen, potassium, and phosphorus. Nitrogen fertilizer is mainly derived from natural gas, potassium and phosphorus are typically mined. Then with some time, water, and equipment, a farmer can produce feed for livestock or ready-to-eat produce. There is one extra step of the value chain for animal products, which is to feed feedstuffs to animals over time, before harvesting the "animal product". Finally, the produce or animal products need to get to a grocery store, restaurant, or processing plant. It should be very apparent that energy sources such as natural gas, oil, and gasoline are deeply embedded and are key components of the food production system.

Analyzing Food & Energy Prices

The most important agricultural products in the global food chain are rice, wheat, soy, and corn. The first two are major sources of carbohydrates while the latter two are key feedstuffs for most livestock in the U.S and around the world. Key energy products are natural gas and crude oil.

After analyzing the data, I came away with a few interesting observations.

  1. Historically, the relationship between agricultural products (wheat, rice, soy, and corn) has a weak, but time-varying, relationship with natural gas and crude oil

  2. All agricultural products have risen significantly since 2021

  3. The relationship between energy and food prices seemed to have some element of causality in 2021 (higher energy prices were turning into higher input costs for farmers), but since 2022 this relationship has shifted...

  4. The real shock to both energy and food prices is the war in Ukraine, driven by the fact that both Russia and Ukraine are major wheat exporters, and Russia's role in the global energy, and chemical markets.

  5. This "shock" was observed in the data as the correlation between energy prices and multiple key feed prices dramatically strengthened well above historic averages in 2022.

So you might be thinking, “Okay, food and energy prices seem to be driven by the same factor, but I am not the President of Russia, what can I do?” First off, if you are a farmer, especially a ruminant livestock farmer, the best way to break yourself free of this relationship is to run a managed pasture system for the bulk of your feed production. Putting your livestock on a well-managed pasture will most likely result in a significant reduction in herbicide inputs, fertilizer inputs, gasoline and equipment use, labor cost, and depreciation. With chemical inputs going to zero for any operation where the livestock is not frequently taken off of pasture. Depending on the farm, the cost of feed and labor normally decreases around 50% during the grazing season compared to a conventional livestock operation.

For more information and resources on this please visit https://grasslandag.org/.

For fruit, nut, and vegetable farmers there are plenty of options available to help reduce their dependence on traditional energy sources. For example using manure instead of chemical fertilizers, composting, acquiring small animals to turn agricultural waste into fertilizer, and chemical-free weed-killing methods can significantly reduce dependency on traditional energy sources.

Connor's Sustainability Tips

While food and energy prices remain beholden to global issues (War in Ukraine), there are things we can do in our everyday lives to improve and support sustainable farming that is less dependent on foreign energy sources.

  1. Buy local

  2. Buy grass-fed beef,

  3. Buy pasture-raised animal products,

  4. Buy organic, especially for grains, legumes, and dairy

  5. Limit your processed foods

One extremely common misconception is that “fake beef” is more environmentally friendly and less dependent on traditional energy sources than actual beef. This misconception couldn’t be farther from the truth. Imitation beef is made from soy, or other similar legumes, which we have already shown to have a very strong relationship with oil prices. Furthermore imitation beef needs to be highly processed in a factory, while normal beef just needs to be butchered. In almost every category of sustainability grass-fed beef is head-over-heels "better" than imitation beef. On top of that, the majority of U.S grass-fed beef producers are small family-run operations.

The great thing about the economy of the U.S is that consumers actually have a very large amount of power, even if it doesn't seem like it. By improving your buying decisions as a consumer, you can help incentivize businesses that help improve the environment and reduce our overall dependence on traditional energy sources in the U.S.

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