Chapter 29
Food and Energy
It is always important to track large industry categories and how they might be impacting the wider economy, whether you plan on investing in them or not. These are sectors that are the big components of the gross domestic product (GDP) and can have a major impact on labor markets and inflation as well as overall supply and demand. In many countries housing and health care are the largest household expenditures and are huge components of the economy. The cost associated with housing and healthcare in people’s budgets is large in the United States but it is a fairly stable and predictable expenditure from year to year. Therefore, it is unusual for pricing changes in these categories to cause a shock to spending and demand.
The next two biggest categories of household expenditures are usually energy and food. While a smaller portion of expenditure, these items typically have very volatile prices. The movements in these prices can disrupt and influence peoples’ inflation, spending, and savings expectations more than housing and health care because of how significant and unexpected the price movements can be. Prices are so volatile in these two industries that they are excluded from “core” inflation results, which are widely used by central bankers to gauge near term inflation trends. There are numerous widely distributed and well followed macroeconomic reports on housing and health care. There is somewhat less on energy and much less on food. Because of the ubiquity and price volatility in food and energy they are vital to follow to get a sense of how consumers are being impacted. Both industries are also going through considerable change due to shifts in technology and sociology.
Fossil fuels, like oil and natural gas, have been the key source of energy for much of the world for some time. The economies of the nations that produce most of the oil and gas tend to be dominated by that industry, such as Saudi Arabia and Russia. High energy prices help these economies and, in some cases, are vital to their well-being. However, for most companies and consumers higher energy costs are a burden. Energy costs that cause increase in gasoline, heating, cooling, and electricity draw income away from other sectors. When companies get hit by higher energy costs, their customers are too, and this makes it harder to pass along price increases, so margins can get squeezed.
Traditional analysis of the energy industry focus on supply and demand dynamics and the supply factors have been controlled in part by the major oil cartel, Organization of the Petroleum Exporting Countries (OPEC), which accounts for about 40% of the world’s oil production, based on many estimates, but much more of its proven reserves. Geopolitics and technology have changed things for OPEC as the United States has become a much bigger producer of energy. There has been increasing tensions among OPEC members and major political problems in countries such as Iran, Libya, Venezuela, and Nigeria. The development in technologies that have allowed shale production in the United States to boom and this has appeared to be a huge factor in energy prices and the result is that OPEC has less control of pricing than it once did. The fracking production is much more flexible and can come on and off stream at lower costs and more quickly than other sources of fossil fuels, such as deep-sea offshore production or a sovereign nation’s development program.
The demand side for fossil fuels is being changed due to technological and social aspects. Oil’s transportability has always had an advantage over natural gas. However, now there are facilities to produce liquefied natural gas (LNG) that can easily be transported and that could be changing the value of gas heavy fields. Then there is the push toward ecological and sustainable alternative energy sources ranging from nuclear, wind, solar, biofuels, water turbines, and other sources. Many of these are being subsidized by government programs. From 2000 to 2016 renewable energy production grew by approximately 40% in the developed countries.88 There are several reasons that alternative and sustainable energy sources are being increasingly developed, countries want (a) less dependence on a supply from a few concentrated nations, (b) a greater understanding of the finite nature of fossil fuels, (c) they are an alternative to turn to as a way to combat cost spikes, and (d) ecological concerns have increased as countries and individuals focus on decarbonizing the energy stream. In the more economically developed countries there is significant focus on energy efficiency and overall reductions in usage, too. Automobiles, a major user of oil products, have been lowering fuel usage using everything from energy efficient windows to lighter car parts and getting more power from batteries. The same is true in housing. Of course, other energy sources may develop their own problems, for example, the demand for lithium used in batteries is very strong and mining activity has accelerated in South America and Australia for this mineral.
While developed countries are making major efforts to reduce carbon producing energy sources and new production methods are causing changes to the energy industry, demand is also changing in emerging markets. Faster growing less developed countries are still often seeing increased use of traditional energy sources, while energy and efficiency are important to many of these countries, expediency often calls for them to deploy capital in areas to enhance growth other than on ecological enhancements. Overall, this is gradually causing a shift geographically where energy demand and specifically demand for oil is coming from, causing more erratic and complex factors to impact prices of energy, power projects, and logistics.
Electricity usage has been increasing and electrical utilities are becoming more varied in their generation methodologies and more efficient. Many large utilities have developed sustainable energy projects and have diversified their energy sources to become less wed to one type of feedstock. They are looking to improve efficiency through smart grids and load shifting as well as developing better energy storage with newer technologies like super-capacitors. Better monitoring technology and data on usage has had a major impact on utilities’ operational improvements and their ability to inform customers on better energy usage patterns.89 More developments in storage and transportation of electricity may reduce generation needs over time as well.
Energy demand is shifting, and the cost equations have seen important new variables added to the equation. Economic growth will likely continue to lead to increased demand, but the demand may be for different types of energy sources and in different locations than in the past. It will continue to be a huge expense factor at the micro through the macro levels of the economy.
Food supplies energy to humans and animals. The food industry has become vastly more efficient over time as fewer people have been needed to be able to produce more food. This is especially true in the United States where major technology changes in the food industry have driven efficiencies and allowed for more and varied food to be widely distributed. These technologies have included bio-engineering that have made many food stocks more hardy, selective breeding, logistic improvements and more efficient and flexible refrigeration. However, given the dependence on weather for the clear majority of food, there are uncontrollable vagaries that impact the food supply chain and the cost of food. There are also periodic diseases that can wipe-out crops or require culling of animals.
Energy is a huge expense in the overall cost of food as well. Some studies have estimated in the United States food chain from production to storage to preparation energy usage accounts for somewhere in the low to mid-teens of all energy costs in the United States and energy accounts for about 6% of each dollar spent on food by consumers.90 The industry is always looking for energy efficiencies within the food chain.
Food demands are changing. In the more advanced economies there is an increased focus on health and ecologically sustainable food, this is changing eating habits and causing differences in demand. While knowledge and education are driving more people toward healthier choices, it can be somewhat cost prohibitive for some. It is often difficult to eat on a budget and to eat healthy. In countries where there is a significant millennial population, there has tended to be a bias toward organic foods and there are some increased incidence of food allergies which have reduced demand for gluten and starches versus other generations. Millennials also tend to eat out of the home more. In the countries with advancing economies the demand for proteins tends to rise as affluence increases. The United Nations, the OECD and other agencies, track and predict changes in food demands and publications predict things like increased sugar demand in Africa and lower pork consumption in China in coming years. These reports highlight how food demand changes.91
The food chain requires consumers to have a high level of confidence in the safety of foods. Therefore, companies must take responsibility for all aspects of the supply chain because a tainted product can destroy a brand or a company and change long-term demand. There is significant ability for customers to switch who they buy from and what they buy. This substitution effect can be driven by health, price or scandal. These factors lead to more volatility in demand for specific products as well as more extreme successes and failures of individual brands than in many other industries.
Food is critical from a humanitarian aspect. Hunger and famine are devastating to societies, countries and regions. Nations with excess food supply really must feel an obligation to help where possible. When there is a humanitarian need to redirect food supplies, it is the right thing to do, but does disrupt normal supply and demand. Normal supply and demand in the food industry can be massively skewed by government policies as well. The interference with market forces can be significant. Sometimes it might be done to protect agricultural production, from a security stand point, even if economics is not supporting it. Other policies that can skew the food market place can be a program that includes transfer payment style food programs, export policies, or changed agricultural regulation used to impact certain regions or products.
Agriculture is intertwined with real estate. Like many other energy sources, most food is developed from the ground. As the agriculture industry changes so does land use. In some cases, greater efficiencies can free up more land, but sometimes crop switches to certain more profitable products can demand more space. Similarly, the food service industry and the out of home dining industry are increasingly taking up real estate at places where retail stores used to be. Shopping malls across the United States are effectively becoming higher end dining malls, food courts that offer upscale steaks and seafood, Chinese, Italian, or barbecue cuisine. Science may lead to land use changes too. There are rapid developments in using plant fibers in new ways. These include using plant fibers to strengthen products like paint and lumber. These developments could lower the carbon footprint of these products and make them last longer.92 While on one scale using these sustainable more natural products instead of those developed from fossil fuel may prove to be a great business and better for society, there are always ramifications, and it could crowd out food production, given the limited real estate dedicated to agriculture.
Energy and food are huge volatile portions of company and make up a large portion of personal expenditures. It is hard to follow or understand any economy without paying attention to these two industries. Monitoring these industries can give good insight into demand, inflation, capital flows, prices, logistics, and infrastructure as well as sociological changes that are driving demand more broadly in the economy. Almost any meaningful change in these two industries eventually ripples through an economy. Every major nation has government agencies that oversee these aspects of the economy and usually have significant data available, choosing a few industry leaders in these industries and monitoring their financial reporting and stock prices can be helpful, too. Keep in mind when looking at data the significant changes to both the supply and demand side that have been taking place in both the energy and food industries.