Russia, are they taking the proverbial?

The cost-of-living crisis was a major part of the recent UK election campaign. While food inflation has slowed materially, food prices remain elevated. However, there are forces at work beyond the control of the new Labour government that suggest food prices are likely to remain a challenge for many UK households.

Following Russia’s invasion of Ukraine, energy prices rocketed and this fed through into the European food supply chain. Climate change has also played a part in driving food prices up with more extreme weather events not helping farmers. Record breaking Hurricane Beryl recently became the earliest-forming Category 5 hurricane on record, resulting in 44 deaths and estimated damage of more than US$6 billion. Bringing rain to the US mid-west at a critical time for grain development, it has actually prompted positive growing conditions, suggesting increased supply. Global grain prices have fallen as a result. These are now back to 2020 levels, having surged following Russia’s invasion of Ukraine.

Government intervention may also be to blame for higher food prices. According to one leading agricultural commodity trader, there has been a proliferation of non-tariff trade barriers in response to the war in Ukraine, as more governments have sought to protect domestic food stocks. For example, in 2022, Indonesia banned palm oil exports to protect the local market, while in 2023, India imposed export restrictions on certain types of rice to try to prevent domestic prices from spiralling.

With a growing world population, increasing crop production and yields is vital. However, this has created another challenge within Europe, one that is also a direct result of the war in Ukraine. Among these is urea, the cheapest form of nitrogen-based fertiliser. Sanctions have been imposed limiting sales of Russian natural gas, but Russia is now converting the gas into urea, which is exempt from sanctions and exporting that in vast volumes. A third of the EU’s imports of urea now come from Russia, with the amount imported in 2023 close to record levels. With Russian urea flooding the EU, there are viability concerns for European manufacturers of nitrogen-based fertiliser   resulting in them shutting down plants because they can’t compete. This poses yet another risk to long-term food security.

Having seen the danger of being overly dependent on Russia for natural gas, will the EU wake up and smell the fertiliser problem?

This is another reminder about food security and supply. Despite the promises of politicians, food prices are going to remain volatile and a hot topic for many households.

What have we been watching?

Just when you thought US politics could not become more divisive, Donald Trump survived an assassination attempt. Meanwhile, Joe Biden suffered fresh blows with more appeals to step down, this time from Nancy Pelosi and Democrat fund-raiser George Clooney. However, despite the disturbing situation in US politics, US equities edged up to another record high, helped by better-than-expected inflation data and the continued AI frenzy. The latest AI-related stock to jump in value is Taiwanese chip manufacturer TSMC which is listed in both Taiwan and New York. Its value broke the $1trillion market value barrier, putting it ahead of Tesla as the seventh most valuable technology company. TSMC is one of AI chip designer Nvidia’s main manufacturing partners. The UK’s political stability compared to the US and parts of Europe saw Sterling head towards $1.30 while the more domestic-focused mid-cap index hit a two-year high.

America’s allies in the Pacific warned that a Chinese state-sponsored hacking group poses a threat to their networks. South Korea, Japan, and Australia all attributed malicious cyber activity to China. It is the first time that Australia has pointed the finger at China, its largest trading partner.

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In the UK, the new Labour government has hit the ground running, but new Chancellor Rachel Reeves already looks to be lining up tax increases and spending cuts in the Autumn Budget. She warned that the government has ‘inherited the worst set of circumstances since the second world war’ and has instructed Treasury officials ‘to provide an assessment of the state of our spending inheritance so that I can fully understand the full scale of the challenge.’ The review will pave the way for ‘difficult choices.’ Meanwhile, retail sales declined in June as cooler weather adversely impacted clothing sales. However, the UK economy outperformed expectations in May with GDP expanding by 0.4% as activity in the construction sector recovered from the wet weather. Sterling strengthened to over $1.29 as stronger than expected economic growth and ‘hawkish’ comments from some members of the Bank of England raised doubts about the prospect of an August interest rate cut.

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In the US, Jerome Powell, Chair of the Federal Reserve (Fed) presented a semi-annual Monetary Policy Report to the US Senate. His speech included something for everyone confirming ‘considerable progress’ towards lower inflation but didn’t do much to shape expectations around the key message of ‘when’ interest rates may come, saying the decision remains ‘meeting by meeting.’ US CPI inflation was better than expected in June at 3%, down 0.1% from May, while core inflation, which strips out food and energy, was up 0.1% to 3.3%. The US 10-year Treasury yield dipped below 4.2% as hopes of an interest rate cut increased.

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China’s economy grew by 4.7% in the second quarter of 2024 which was weaker than expected. The data coincides with China’s third plenary session, with Chinese investors hoping president Xi Jinping will announce major new measures to bolster the flagging economy.

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Brent oil remained around $85 despite an escalation of fighting in Gaza and along the Lebanon border.

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Finally, with the value of outstanding student loans reaching £236bn – will it realistically ever all be paid back? A report suggests almost 1.8 million people now have at least £50,000 of student debt. One of the unforeseen challenges is that interest payments are linked to the Retail Price Index – the higher of the two official inflation measures. While inflation is now slowing, interest costs are still climbing. Labour’s manifesto said the current higher education funding settlement does not work, but hasn’t yet outlined the alternative option.

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Read Last Week’s Alpha Bites – Can Sleepy Joe spark fireworks?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.