While most want to focusing in the wrong direction regarding inflation, completely ignoring the supply side of the equation. This is why the Fed will not solve the issue: they did not create it.
The situation with the Ukraine is an example of how this is unfolding.
Russia is telling the West to back off. Both sides are posturing which is better than war. However, it does not come without some side effects that we are all going to feel.
What gets painful is when "shots are fired across the bow". Russia took the first step and few even mention it.
Ammonium Nitrate
Russia is focusing upon domestic develop, or at least that is the claim.
For the next two months, it will not export ammonium nitrate keeping the supply for domestic farmers. The idea is to keep prices down for them as supplies dwindle.
Ammonia gas, one of the key materials in AN production, has seen prices rise more than fivefold since October 2020. Rising costs for natural gas, a key input of AN production, have also impacted AN prices. Those higher prices have forced farmers to reconsider their nitrogen fertilizer usage, favoring legumes such as soybeans, which require less nitrogen fertilizer than corn and wheat. Ammonium nitrate is one of two main sources of nitrogen fertilizer, with the other main source of nitrogen being derived from urea.
This is a problem for the West since Russia is responsible for 2/3 of the global production.
Russia represents around two thirds of the world's annual 20 million mt ammonium nitrate production, most of which is used in fertilizers to improve yields for crops such as corn, cotton and wheat.
This is causing some farmers to switch to soybeans since it des not require ammonium nitrate. Of course, this will likely send prices even higher on fertilizers.
We also can see from the list how these are vital food staples are also at risk. If farmers are switching away from them, that will reduce supply which will send the prices up.
Unfortunately food prices are something that people cannot escape. This is not discretionary spending.
Natural Gas
Another piece of the puzzle is energy. It is well known that Russia in a major player in that space. Western Europe relies heavily on natural gas for heat. Escalating tensions could cause reactions from Russia that cause greater instability in the energy markets.
Like food, this is not something that people can get away from.
So what happens if Russia decides to cut NG to the Europeans? This will cause many issues since energy is interwoven into everything. Of course, this would have global ramifications since energy is globally traded.
When a major portion of the global economy gets hit, it tends to have worldwide impacts. Other countries can try to make up for the loss but that gets to be an issue since Russia is such a large supplier.
This long was the threat that Russia had against the West.
So for all the talk of sanctions, it has an answer.
Unfortunately, none of this is going to help prices around the world. Energy and food prices were already being hit hard. Anything that further disrupts the supply chain will only further add to the pain.
An Interwoven World
It is easy to see from these two examples how interwoven the world truly is. Nothing operates in a vacuum. This is why analysis of complex systems is often misguided. People like neat little packages that sum everything up. Sadly, this s not how the world works.
This is further magnified when said analysis is wrought with false assumptions.
Commodities are in a bull run. It is no different than any other market. Those who speculate in this arena are loving life. However, there is a major downside for everyone else.
Understanding the complexities of the macro world is crucial. The Russian conflict is going to create more supply chain issues even without a shot being fired.
It appears supply chains issues are going to stay with us for a while. We will see if this situation over the Ukraine escalates.
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