Natural gas is an important raw material in a wide range of economic activities, including heating, electric power generation, plastics, manufacturing processes and agriculture. For example, fertilizer prices, responding to significant cost increases for key chemical ingredients such as natural gas, have more than doubled over the last year. This can have a two pronged effect on food prices. Rising costs for key agricultural crops such as corn, are highly likely to translate into higher prices for household staples such as breads, other cereal based products, cooking oils and grain fed meats. In addition, higher fertilizer prices may encourage farmers to cut back on use, resulting in reduced yields, which typically trigger higher crop prices.
Investors should consider how many moving parts are involved in assessing and projecting inflation. Perhaps, one of the most important, and probably one of the least understood contributors to inflation, is natural gas. When politicians mess with natural gas, the unintended consequences tend to materially exceed their assertions. See our blog of January 5, 2022 “Shooting Yourself in the Foot”, for an example of really messing up.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA