Author: Philip J Palin

Global food flows

Posted on by Philip J Palin

[Update Below] Upstream food capacity is variable by place, precipitation, and season. Midstream flows are vulnerable to a wide range of disruptions. Downstream demand is profound — and sometimes desperate, especially in the face of price increases.

Grain exports from the Northern Black Sea through the Dardanelles were fundamental to food flows (and prices) for the Athens of Socrates, Plato, and Aristotle. Russian (including Ukrainian) grain exports — and related imports — were a significant backstory for the Crimean War (1853-1856). Since 2010 Ukraine’s wheat exports have quadrupled. Russia exports even more wheat than Ukraine. The largest proportion of both Russian and Ukrainian agricultural exports depend on maritime channels through the Black Sea (more).

Less than a dozen ports along the Black Sea handle large volume food flows at comparatively high velocity. But for the last five months the Black Sea has been transformed from an effective bottleneck into a troublesome chokepoint.

According to FarmdocDaily from the University of Illinois:

Last year, Russia and Ukraine accounted for almost 30% of the global trade in wheat. Because of the war, Ukraine’s wheat production for the marketing year 2022/23 is projected to be 19.5 million metric tons, down 13.5 million tons (-41%) from last year. The USDA includes estimated output from Crimea. Harvest began at the end of June and will continue until mid-August. Russian wheat production is expected to be 81.5 million tons, up 6.3 million tons (8%) from last year… Total harvested area is projected to be 27.8 million hectares, up 1% from last year.

Russian grain exports have not been physically blocked, but flows have been disrupted by spillover effects of a wide range of economic sanctions (more).

The predictable outcome of upstream reductions (and worry) and midstream complications (and more worry) has been downstream price increases (see chart below). But even before Monday’s departure of a grain shipment from Odesa, the March to May price spike had fallen almost as fast as it had risen. Worry has been assuaged by a bumper US wheat harvest and close-to-normal harvests for Canada (more and more). Despite drought in France, German wheat harvests are expected to rise slightly. It’s too early to predict Argentina, but conditions don’t look as dire as a few weeks ago. Consumers and markets have demonstrated a readiness to embrace wheat alternatives. Food price increases have also been moderated by falling fuel prices.

Russia’s invasion of Ukraine plus related sanctions have created real constraints and cause for worry. The increasing strength of the dollar — and dollar-denominated commodity contracts — increase global food costs. Many have gone hungry and some have died as a result of disrupted flows and increased prices. But so far production capacity has been diverse enough to fill most gaps. Distribution capacity is delivering where demand can be expressed with effectual pull (in other words, dollars or other recognized transactional value). The most treacherous problem is where demand is real, but non-effectual.

August 5 Update: “The FAO Food Price Index* (FFPI) averaged 140.9 points in July 2022, down 13.3 points (8.6 percent) from June, marking the fourth consecutive monthly decline. Nevertheless, it remained 16.4 points (13.1 percent) above its value in the corresponding month last year. The July decline was the steepest monthly fall in the value of the index since October 2008, led by significant drops in vegetable oil and cereal indices, while those of sugar, dairy and meat also fell but to a lesser extent.”

Grain ship departs Odesa

Posted on by Philip J Palin

[Updates below] Today at 0948 local time the bulk carrier Razoni departed Odesa, Ukraine for Tripoli, Lebanon carrying 26,000 tons of Ukrainian corn. This is the first shipment to leave a Ukrainian Black Sea port since the war began on February 24. The Razoni is one of seventeen cargo vessels trapped when the war began. Together these ships hold almost 580,000 tons of grain.

On July 22 Ukraine and Russia signed agreements with the United Nations and Turkey to open safe corridors through the war zone from Odesa and two other ports. The next day Russian missiles hit near Odesa’s port. Sunday a drone-delivered bomb exploded at the headquarters of the Russian Black Sea Fleet in Sevastopol. Given these and other provocations, the Razoni’s (Reasonable in Croatian) sailing is a crucial step in restoring global grain flows. (On the map below the Razoni is circled in red, as of about 0430 Eastern.)

More than 20 million tons of last year’s harvest have been blocked by insufficient alternatives to Black Sea ports. Rail links to Baltic or North Sea or Mediterranean grain terminals are complicated by lack of capacity and different track gauges. The Romanian port of Constanta (shown on map below) is handling more Ukrainian grain than before the war, but was already at capacity moving Romanian, Bulgarian, Serbian, Hungarian, and Slovak grain. Truck and rail connections between Constanta and Ukraine were not designed for high volumes (more and more and more and more and more). This year Ukraine’s grain exports have been slashed by more than half. High volume channels are seldom flexible or easy to replace.

According to the New York Times, “An additional estimated 40 million tons — of wheat, rapeseed, barley, soy, corn and sunflower seeds — is expected to be harvested in the coming months. Storage facilities not destroyed by Russian shelling are filling up, and room is growing scarce for the freshly reaped crops.”

Extracting loaded ships that have been trapped in the war zone is one thing. Convincing more ships — and their insurance carriers — to trust the safe corridors will be even more challenging. An initial $50 million in cargo coverage was put in place last week. The status of loading infrastructure at the three “safe corridor” ports is also not entirely clear.

According to the Financial Times, “Another 16 ships are awaiting departure… The conflict has left as many as 47mn people globally at risk of acute hunger, according to the World Food Programme.” (more) People in thirty-eight nations are especially vulnerable to any significant disruption of Black Sea grain flows. Below is a chart developed by S&P using FAO 2021 data differentiating these high risk consumers of Ukraine’s and Russia’s grain.

There is profound demand, but not always effectual demand. There have been significant reductions in current distribution capacity and cause for serious concern regarding next year’s grain production and distribution capacity. The departure of the Razoni is good news. Its arrival in Lebanon may well be lifesaving. Will sixteen more ships soon follow? If so, will that be enough to renew maritime cycle times for at least three Ukrainian ports? Many were holding their breath this morning. Deep breathing is advised for the month (and more) ahead.

Cargo Ship Razoni location at approximately 0430 Eastern (red circle off Odesa)

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August 2 Update: In an interview with the Financial Times, Ukraine’s infrastructure minister, Oleksander Kubrakov, said he expects no more than five vessels to leave in the next two weeks from Odesa, Chornomorsk and Pivdennyi. In recent years these three ports have discharged roughly 60 percent of of Ukrainian grain exports, often in carriers with double or better the cargo space of the Razoni. Still, Kubrakov aims to receive the first new cargo carrier before the end of August.

August 5 Update: Three more bulk cargo ships have departed Ukrainian ports. The first new ship is being inspected on its way to Chornomorsk (between Odesa and Constanta).

August 7 Update: According to Bloomberg, “A flotilla of four grain vessels sailed early Sunday from Ukraine’s Black Sea ports, Infrastructure Minister Oleksandr Kubrakov said… The Liberia-flagged Mustafa Necati and the Star Helena, Glory and Riva Wind, which all sail under the Marshall Islands flag, have almost 170,000 tons of agricultural products on board, he said. The exact contents of the cargoes and their destinations is unclear.  Late Saturday, the cargo ship Fulmar S arrived at Chornomorsk, the first incoming vessel since Russia’s invasion of Ukraine in February. “Our next step is to ensure the ability of Ukrainian ports to handle more than 100 vessels per month,” Kubrakov said.  

August 8 Update: Today the third of three ports designated as points of origin for a Black Sea humanitarian corridor saw off its first grain shipment since the war began. The bulk carrier Sacura departed Pivdennyi, north of Odesa (see map below, Sacura in the lead) to rendezvous with the Arizona out of Chornomorsk and continue toward inspection outside the Bosporus. Ten grain ships have departed these three Black Sea ports since August 1.

August 13 Update: The Financial Times has a good update on the circuitous “rest of the story” for the Razoni with helpful insight into the complicated realities of global demand and supply.

Food consumption: summer diets?

Posted on by Philip J Palin

According to this morning’s report from the Bureau of Economic Analysis, during the month of June US real personal consumption expenditures continued flat, almost unchanged from January and basically the same as October 2021. The “feels-like” rate of expenditure is much hotter because of inflation (economic humidity?), but in terms of steady 2012 dollars US demand for aggregate goods and services has been very consistent.

In June 2019 US consumers spent $990 billion on food-at-home (see chart below). In March 2020 fear-of-missing-out (and plenty more fears) spurred grocery purchases to over $1200 billion. But as most shelves continued to be stocked and various viral fears subsided, the contents of grocery carts settled at about six to seven percent higher than pre-pandemic, partly reflecting significantly reduced consumption of Food-Away-From-Home.

Then in the first quarter of 2021 grocery purchases lifted over ten percent and wobbled there most of last year. I will confess (again) that I expected to see this level of grocery buying gradually decline as eating-out climbed. But according to the data, starting in April 2021 American consumers spent as much or more at restaurants than pre-pandemic, even while maintaining our plentiful pandemic pantries (and/or expanded waistlines?).

Until February 2022 — since at least Super Bowl Sunday real expenditures on groceries have declined. Despite this decline, US consumers are still spending well-above real pre-pandemic trend on food-at-home and far above the prior trend on food-away-from-home. I suspect — but don’t have evidence to prove it — that this bifurcation reflects the very different “felt” reality of the top two earning quintiles from the other three. (Nominal dollars spent on groceries are still increasing slightly, but this is due to inflation.)

On June 26, in the context of several posts related to how supply chain disruptions can contribute to inflation, I wrote:

I hypothesize that between May and September we will see food-at-home real consumption gradually decline by another seven to ten percent and then flatten or incrementally increase. I hypothesize that durable goods and services will begin to show slopes similar to 2022 food consumption. I also hypothesize a more rapid rate-of-change than that for food between last November and April. These are deniable hypotheses. I am not sure. It does seem plausible. If this happens, demand and supply will be closer to equilibrium.

The durable goods slope is not (yet?) displaying my anticipated slant. Neither is the services slope… but I really did not expect services to begin falling until summer is over. The June services number is lower than expected. Sustained demand for durable goods remains higher than I expected five weeks ago. (This is why it is called a deniable hypothesis.)

In April the PCE for food-at-home was $1071 billion. Real food expenditures in June were $1056 billion or a decline of about 2.5 percent. If the May+June rate of change continues through the end of September consumption would be lower by slightly less than seven percent. I hope this more gradual easing is maintained. That result is certainly better for the grocery industry and would be consistent with an economic “soft-landing.” More when we see July’s data…

In any case, at least in the food sector, we now have a level of demand much better calibrated with current production and distribution capacities. In my judgment, this means the supply-driven contribution to inflation is diminished.

BELOW: INFLATION ADJUSTED PCE FOR FOOD-AT-HOME THROUGH JUNE 2022

Decadent Demand?

Posted on by Philip J Palin

President Putin is depending on decadent demand. He is depending on European consumers and bourgeois politicians to succumb to high prices and chilly room temperatures.

Putin has restored General Winter to a prominent place in Kremlin councils. He hopes this month’s temperature extremes will return to Europe in dramatic winter garb. January is Berlin’s coldest month with an average low of 29°F and high of 38°F.

In recent years natural gas has generally provided between one-fifth to one-quarter of the European Union’s total energy mix. There is considerable variation nation to nation.

Natural gas fuels roughly one-fifth of EU electrical generation. This ranges from over 40 percent in Italy and Netherlands to less than 15 percent in Germany or barely more than 5 percent in Denmark.

Last year more than 40 percent of EU natural gas consumption was supplied by Russia. Since February 24 this proportion has plummeted. Flows vary by season. I’m not confident of a current comparative statistic. But several credible sources (here and here and here) indicate that Russia’s EU market share for natural gas has been reduced by at least one-quarter, maybe as much as one-third. But, once again, dependence on Russian flows differs considerably by region. Hungary, Slovakia, Italy, and the Czech Republic are much more exposed to reductions in Russian flows than other EU nations.

Europe has significantly increased imports of non-Russian LNG. In June for the first time, US LNG deliveries to Europe exceeded Russian pipeline deliveries (more). The US would almost certainly be exporting even more if the Freeport LNG facility was still operating (and price-pull could be found). Qatar and Algeria (more) are also increasing LNG flows to Europe (more). As of July 25, EU natural gas domes are about two-thirds full. [Below is a map showing current LNG terminals and natural gas pipelines. At the source map natural gas storage facilities can also be located.]

Yesterday, July 26, The European Commission announced decisions intended, “to reduce gas use in Europe by 15% until next spring. All consumers, public administrations, households, owners of public buildings, power suppliers and industry can and should take measures to save gas. The Commission will also accelerate work on supply diversification, including joint purchasing of gas to strengthen the EU’s possibility of sourcing alternative gas deliveries.” According to S&P, a significant proportion of this reduced consumption may also be teed-up by price-driven reduced demand (see chart below):

A 15% voluntary gas demand reduction target aligned relatively closely with a Platts Analytics’ estimate of demand destruction due to high prices. Gas demand in Northwest Europe would fall by 13% between August 2022 and March 2023 compared to the five-year average demand for the period, Platts Analytics modelling showed. Based on its TTF price forecast of Eur125-140/MWh, demand would be reduced in the power sector through maximum coal and oil switching, while industrial demand is forecast to drop by 15%.

President Putin has cut back Russian natural gas flows to Europe. He has not cut off these flows. As long as any Russian natural gas is going, this gives him potential leverage to cut further or promise increases. The cuts so far are enough to cause European economic (and political) friction (and to significantly increase prices being paid for what is delivered). Putin perceives that time is on his side. Maybe the Atlantic hurricane season will wallop US LNG exports. Maybe General Winter will descend on Amsterdam to Warsaw with the coldest temperatures in two centuries. He is confident that contemporary European consumers — and voters — are effete, weak, self-indulgent, and can eventually be distracted from any concern for Ukraine… much less what might come after Ukraine.

Yesterday the host of the EU energy consultations said, “… everybody understands that this sacrifice is necessary. We have to, and we will, share the pain” (more). Putin is not alone is perceiving time as a potential ally.

The sharp and mostly unified NATO (plus) response to the invasion surprised Putin. But it now seems clear enough (to him) that this was just reflexive sentimentality. With the help of some snow and ice, his debauched neighbors will, he now expects, turn against their current political leaders who will then turn to him to restore flows…

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WEDNESDAY AFTERNOON UPDATE: The words above (and charts below) were posted about 0600 Eastern this morning. Natural gas prices were already moving higher. They continued to do so as the promised Gazprom cutbacks materialized. According to the Financial Times: “European gas prices jumped higher on Wednesday after Russia followed through on its threat to further reduce supplies to the region, increasing the risk the continent could face shortages in the winter months. Gas prices rose as much as 13 per cent on Wednesday as flows on the Nord Stream 1 pipeline were cut to just a fifth of normal capacity.” (More and more and more.) Prices might be even higher (and will move higher) when China’s demand for energy recovers. EARLY THURSDAY MORNING: European natural gas prices eased overnight and, so far, this morning on indications that the lower flows from Russia are, in fact, flowing.

Mid-summer US grocery flows

Posted on by Philip J Palin

The US grocery supply chain continues to close the gap between demand and supply.

Despite (and because of) high food inflation and plenty of competition for spending (e.g. eating out and travel), in June US consumers spent almost one-fifth more on groceries than in June 2019 (see first chart below). Inflation-adjusted spending is flat or incrementally down, but Americans are still buying many more calories (not just spending many more dollars) than pre-pandemic (more and more and more).

Despite this very strong pull, push is catching up. According to IRI, there are now fewer stock-outs than earlier this year (see second chart below. Since January there have been improving inventory levels for grocery stores (see final chart below). We are now very close to parity with 2019 grocery inventories. These are May numbers from the US Census survey. Based on what I have heard from grocery distributors, I bet the inventory to sales ratio further improved in June and July (more).

For my friends in the grocery industry — and for general economic reasons — I am glad that we have not seen significant demand destruction for groceries as inflation and spending-competition increase. I will also confess: such persistent pull so much higher than pre-pandemic surprises me. The response by production, distribution, and retail players has been creative, risk-taking, and — as demonstrated by the numbers — effective.

Fuel and food twist and shout

Posted on by Philip J Palin

Deutsche Welle tells us: “Water levels in the Rhine River are just inches away from forcing another shutdown of ship transportation.” Freight volume at Rotterdam was basically flat in the first half of 2022. Loss of the riverine connection, especially if early in the second half, would further narrow flows.

Slower and lower flows characterize many aspects of a Europe once again at war and worried about what’s ahead.

As this blog has repeatedly reported, Russia’s oil — despite various sanctions — continues to flow. More effort is required to buy it, but it is still sloshing about the world. Below are charts from S&P. (The original S&P resource is interactive and very much worth accessing, please also see the shifting sources of European oil imports since February.)

Yesterday there was good news that Nord Stream 1 has resumed operations (more and more). For now the flow is one-third or, perhaps, two-fifths of heretofore, but Europe is happy to get it here and now. Tomorrow is another day.

More good news — or at least progress toward potential good news — in releasing more flows of Ukraine’s grain to world markets, especially customers in the Middle East and Africa. Today a Turkey-brokered agreement will be signed in Istanbul. According to France24, “A coordination and monitoring centre will be established in Istanbul, to be staffed by UN, Turkish, Russian and Ukrainian officials, which would run and coordinate the grain exports, officials have said. Ships would be inspected to ensure that they are carrying grains and fertiliser rather than weapons. It also makes provision for the safe passage of the ships. The control centre will be responsible for establishing ship rotation schedules in the Black Sea. Around three to four weeks are still needed to finalise details to make it operational, according to the experts involved in the negotiations.”

Disrupted channels are the most common complication facing high volume (and especially high velocity) demand and supply networks. Severe reductions in discharge of Ukraine’s grain are a dramatic example. But what we also see is that where effectual demand and production persists, the flow of supply may twist, turn, and cuss, but continue…

BELOW: FIRST FEBRUARY, SECOND JULY

The pour continues, swallow carefully

Posted on by Philip J Palin

[Update below]This morning natural gas is flowing again in the Nord Stream 1 Pipeline. This is a principal channel for natural gas from Russia to Western Europe. The pipeline had been closed for usual summer maintenance. There was, however, concern that future flows could be held hostage to posturing related to the war in Ukraine (more and more and more).

According to Reuters, “Nord Stream 1 transports 55 billion cubic metres (bcm) a year of gas under the Baltic Sea and has been offline since July 11… A spokesperson for Austria’s OMV said Gazprom signalled it would deliver around 50% of agreed gas volumes on Thursday, levels seen before the shutdown.”

Depending on demand and availability of other sources, natural gas typically provides between one-fifth and one-quarter of European Union grid generation (see chart below). Over the last two weeks, reduced wind and heat-related high demand have increased natural gas draws. On some recent days natural gas has provided nearly one-third of EU generation.

Despite the temporary shutdown of Nord Stream 1 and strong demand, European natural gas inventories have not (yet) fallen during July and storage domes are about 65 percent full, ranging from a low of 42 percent in Bulgaria to 100 percent in Portugal. France is at 72 percent. Germany’s natural gas inventories are currently measured at 65 percent full.

According to an S&P report on German natural gas purchases, “The share of Russian gas deliveries averaged 55% in the past, but this fell to 26% by the end of June,” the [German economics] ministry said, adding that last year Russia supplied 46 Bcm of gas to Germany. The lower share in June is a result of Russia’s Gazprom cutting supplies through the Nord Stream pipeline to just 40% of capacity in mid-June, citing issues with maintenance at a key compressor station. The ministry said the claims of technical problems was a “pretext”… Germany currently does not have the infrastructure to directly import Liquified Natural Gas (LNG) (more).

The natural gas network crossing west from Russia through Ukraine continues to operate at less than half its 2020 capacity and flows. Most recent deliveries are to Veľké Kapušany, Slovakia, with Hungary a distant second-place recipient.

The prospect of natural gas shortages during a war-torn European winter has increased the need to maximize inventories and diversify channels and sources.

US LNG exports to Europe have been lower than expected partly due to the fire-related loss of the Freeport LNG terminal in early June. This is usually the second largest of seven US LNG export facilities. But other LNG operations are exporting at full capacity (more). Loss of Freeport has also meant lower than otherwise natural gas prices. Without this, current electric rates in heat-ravaged Texas (and elsewhere) would be even higher.

So obvious it is barely more (or less) than nagging, but still: Concentrating flows to fulfill demand usually enhances efficiency and always concentrates risk. The most beautifully planned bottleneck is one surprise short of becoming a chokepoint.

July 25 Update: Nord Stream 1 flows will now be cut to 20 percent of once-upon-a-time expected. According to the Wall Street Journal, “Russian state-owned energy producer Gazprom PJSC said gas exports through the vital Nord Stream pipeline to Germany would drop to about a fifth of the pipe’s capacity, blaming sanctions-related problems with turbines that have already reduced flows. The fresh reduction in the pipeline’s capacity—from 40% currently to 20%—is expected to take effect Wednesday, Gazprom said.”

Feeling the burn

Posted on by Philip J Palin

Several consecutive days of high temperatures across much of North America and Europe means much more demand for electricity, especially for air conditioning. Over the last decade-plus there has been considerable conversion to natural gas for grid generation. Today close to 40 percent of US electrical generation depends on natural gas.

Until recently, natural gas could claim a significant price advantage over other alternatives. Not so much now. US prices lag global, but the 90-101 percent increase in global benchmarks since January has also pulled US natural gas prices higher especially with recent spikes in domestic demand. According to S&P:

On July 21, the US power burn is forecast to average 48.6 Bcf/d in what would be a new single-day demand record, according to data from Platts Analytics. Assuming the forecast is accurate, the new high would outpace the prior single-day record from July 2020 by over 500 MMcf/d, or about 1%.Already this month, generator gas demand has trended a record-breaking pace for July of 44 Bcf/d. Compared with July 2020, when low prices made gas a go-to fuel for power generators, demand is up about 650 MMcf/d, month to date. Compared with July 2021, generator demand is up by a brow-raising 6 Bcf/d or almost 16%, this month… [See chart below]

Higher prices are tracking this demand. For example the US benchmark Henry Hub futures market is displayed in the second chart below. But paying more for abundant supply is much better than European prospects for not having enough no matter how much is paid (more and more and more and more and more to come).

Dog days bite and hold on tight

Posted on by Philip J Palin

[Updates below] Several days of unrelenting triple digits plus several million people plus an electric grid (more) built for considerably lower demand: Do you perceive a potential problem?

You can keep looking here:

Energy Reliability Council of Texas (ERCOT) Dashboard

Unfortunately the EIA Electric Grid Monitor continues to be down…

Here are some prior comments on the near-term risks facing Texas electric power consumers and downstream systems… meaning most of modern life, certainly including supply chains.

Texas is not the only region facing serious gaps between demand and current grid power capacity (more and more). But the Texas grid is designed to be even more self-reliant than most, and arguably more vulnerable as a result.

Monday Afternoon Update

At 3:30 Central Time the temperature in Dallas is 108 degrees Fahrenheit. Demand is about 2100 megawatts less than current capacity (not counting ancillary services) or within three percent of current capacity. At 3:47 demand was slightly higher. At 3:57 electrical use had increased by about 360 megawatts. I will admit my felt concern was heightened when 1200 miles away a thunderstorm knocked out our grid for about an hour while I was monitoring ERCOT. It is much better to look at supply-and-demand measures than an outage map.

According to S&P today’s most serious threat for continued flows may come at sunset when temperatures will still be in the triple digits and solar power drops. Texas spot prices for natural gas are surging.

July 19 Update: Below is the complete demand curve for the ERCOT grid on Monday July 18. Despite the high temps, demand stayed just below production capacity even as the sun set. But the forecast is for as hot or hotter today… and August is still to come.

Inch by inch, step by step

Posted on by Philip J Palin

Bloomberg has posted a very helpful overview headlined “Supply Chains Inching Back to Normal“. The report includes recent assessments and charts by Oxford Economics, Flexport, Freightos, and more. The core takeaway: “Economists generally agree that US household demand for merchandise will be key to watch in coming months, but they’re split about whether it will stay strong or start to soften.”

Last week’s June retail sales figures have been read by many as a stay-strong signal. There are, however, start(ing)-to-soften signals too. For example real consumption for food-at-home and real consumption of durable goods are both well off peak.

Below are two Federal Reserve sources for overall supply chain fitness. (GSCPI is mentioned but details are not included in the Bloomberg report. The Cass Freight Index is not mentioned.) Given the high-pressure on US supply chains in 2021, this is one time when down-hill slopes are welcome.

Reduced demand and related cooling of friction are also apparent in other freight market indicators. Just one: the van load-to-truck ratio is 30 percent below June 2021. As previously outlined, I expect this softening to widen and persist. I hope for a few months of gliding, rather than sharp drops in demand.

But as the two charts below also suggest, US flows continue to be volatile. There are plenty of current problems (more and more and more) with risks worth anticipating. In the classic Three Stooges routine — inch by inch, step by step — the slow turn is not achieved without related pain.