Weather Forecast: Inflation Relief?

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Food and energy are key drivers of inflation.?Will consumers see some relief by year-end??It depends largely on the weather.

The weather will help determine the size of harvests in the U.S. and elsewhere, the amount of natural gas folks need to heat their homes in the winter, and more.?

As we’ve discussed in previous issues, drought is hammering key growing regions in many parts of the world. In the U.S., for example,?drought has afflicted around 40% of the country for the past two years and is expected to ding yields of corn, wheat, rice, potatoes, tomatoes and more.?

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Corn, in particular, is key to watch, since it’s used at so many steps of the food supply chain. Humans eat it, as do livestock that become meat. Derivatives of corn are even used to make food packaging.?

With energy, it’s geopolitical stormy weather.

Energy issues are compounded by drought and other factors?that are straining supplies. The ongoing war in Ukraine ?has boosted European demand for U.S. natural gas.?

Stockpiles of natural gas are 7.6% lower than a year ago and 11.5% below the five-year average. The situation means an increased risk of price spikes later this year if there is a cold snap.?

The good news: Early weather forecasts are promising.

Temperatures are expected to be above normal in most of the U.S. from September through November. Drought,?meanwhile, is expected to persist in parts of the West, Central Plains and Northeast,?and may even expand a bit, but conditions will improve in the parched Southwest.?

The ideal scenario is a mild, dry fall in which crops can be harvested without issue and stockpiles of natural gas, propane and heating oil can be built up.?

Trouble in one sector will spread to the other, sooner or later. For example,?excess rain around the fall harvest will likely increase demand for propane,?which farmers use to dry their crops, meaning higher prices for winter heating.?

A cold snap that boosts demand for natural gas will result in higher prices not only for winter heating, but also for fertilizer when farmers plant next spring.?

It’s important to note how much the situation can vary by product/region.?

Take soybeans, initially considered a rare agricultural bright spot. Prices have spiked recently, with drought in some states offsetting record yields elsewhere.?

Also heating oil, commonly used to heat homes in the Northeastern U.S.,?but not elsewhere. Heating oil stocks remain unusually low, with prices in states like N.Y. up significantly from last year ($4.99 versus $3.13 a year ago). The problem may improve somewhat if the Northeast has a hotter-than-usual fall, as is expected.?

And beware of non-weather-related disruptions. With supplies so tight,?it wouldn’t take much, say a collapse of the Ukrainian grain deal, to blow up prices.?

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