Why the Price of Oil, Beef, Electricity, and Everything Else Makes No Sense

Introduction

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1:36Bloomberg Audio Studios. Podcasts. Radio.

Podcast Introduction

1:41News.

Podcast Introduction

1:41Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. This is a very special live recording of the podcast. We were over in London for our first ever UK live show. I love going to London. It was a little anxious, putting on a live show, selling tickets and stuff in London.

2:11You never really know who's going to show up in another city, but it is a great time. We had a great turnout. We had some great conversations. It was great to meet some of the fans and listeners there. I really loved it. And yeah, I really enjoyed the live episodes that we recorded. Absolutely. And we had some great guests as well. And what you're about to listen to, two of the perfect guests, really, I think for this topic, obviously commodities is still making all the headlines, really. So we decided to get two of our favorite commodity specialists.

2:42Both of them have been on the podcast before. We spoke with Javier Blas. He is, of course, our colleague over here at Bloomberg. He's a Bloomberg opinion columnist, author of The World for Sale. And we also spoke with one of our former colleagues, Lorcan Roche-Kelly, who not only is a business editor at the Irish Farmers Journal, but actually an erstwhile Irish farmer himself. That's right. Formerly one of our colleagues. Just to note, of course, because things change all the time, this was recorded on May 7th at Wilton's Music Hall in London.

Jet Fuel Discussion

3:12Take a listen. All right. So, Javier, the big question that we have to get out of the way, I'm sure it's on the minds of everyone in the room here, is is Europe going to run out of jet fuel? And will there be, like, should people take that into account when planning their summer holidays to Spain or wherever else? I think that you are making a great impersonation of my father who is asking that question. And also, when it's okay to refuel the car. I'm kind of halfway. It's okay now for gasoline and so on. I said that 7.30 in the morning, please.

3:43I mean, it all depends whether the Strait of Hormuz reopens or not and when, because it has to be a question of when. We are okay with jet fuel for the next few weeks. We'll until certainly the end of June. Then it gets significantly tighter because demand goes up quite a lot during the summer. But the market is working. Every refinery in the planet is maximizing jet fuel production right now. And we are beginning to see that working.

4:14And more companies coming on the record saying that they are okay for the summer. I mean, I will say that some of my friends from university, and Joe makes fun of me whenever I say uni friends, but my friends from uni, we're talking about changing their summer holidays to ferries and trains. So there's real-life demand destruction happening already. You mentioned all of this depends on when the Strait actually reopens. Like, why don't we just ask you that basic question? When do you think the Strait will reopen?

4:44I mean, typically you have a deal when it's painful for everyone in the negotiation. And it's not really painful for either side, or not painful enough for either side to make the compromises needed. Iran is feeling the economic pain, for sure. There's unemployment, there's inflation. But the regime can impose a lot of penuries over the population. And, you know, the Ayatollahs don't face any imminent election. President Trump does face an election later this year. But the price of gasoline is going up.

5:17It's undeniable. Four and a half dollars a gallon. It's more expensive. But still, if you look at the American economy, it's still performing well. Earnings are good. The S&P 500 is near a record high. It doesn't feel for the U.S. that really the president is suffering a massive economic crisis that he's going to force his hand to concede to Iran. And so we are in a really kind of bad situation. You are hoping for a reopening that is painful,

5:47but not yet really painful enough that everyone is forced to compromise. And that's what I'm worried, that it's not getting painful enough. What I will almost want is that Iran was suffering a massive economic problem and that the president was facing $150 or higher. And then everyone has to agree. And we are not there yet. So it may take longer.

Food Supply Discussion

6:09But Lorcan, so again, for those who don't know Lorcan, not only a journalist, but actually long practicing farmer, someone who actually, you know, in the biz, how are we doing on food here? I suppose, a lot of people look at this crisis right now and they say, oh, we're back in 2022 again. And I think we're in a completely different situation. And one of the big reasons we're in a different situation is the world's food supply, 2025, entirely 26, it's been really strong. Like the world is drunk. There is a lot of food. The world is drowning in wheat.

6:39It is swimming in milk. We have so much food out there. The only thing we're short of is beef. We know that the US beef prices are going up, beef prices are going up around the world. But we've loads of chicken, loads of poultry. So there is loads of food out there. The real problem with having loads of food, this is very like what Javier said, there's no pressure in food prices. We see some food prices go up, driven by transport costs more than the cost of producing food. It's the cost of transporting the food from the farm to the factory to the shop that's driving at the price right now. The problem's going to arise in six months and 12 months time when the decisions be made today

7:10about do I plant that field of wheat or do I breed more cattle for next year? And farmers are going to say, no, we're not going to do that. If you look at the US at the moment, forecast out we have the lowest wheat plantation in the US total acreage ever. This is going back to date in 1919. Like, so there's a real squeeze on food, not now, but in 12 months and maybe this time next year, you'll be looking at a burger and the price of the bun is going to cost as much as the price of the meat it's going to be. And that's kind of what we're looking at. And that's the real squeeze. But the pressure isn't there at the moment. There's our headline. The price of the bun

7:40is as much as the price of the burger. I have a farming question, a bit of a sidetrack. If this is about your Japanese knotweed, I have no answer for you. Yeah, well, I need advice on that. But setting that aside, farmers are always complaining about one thing or another. Like, they seem miserable. But when we talk to you, you seem okay. That's because I stopped farming. At least my farmer is somebody else. I gave it up. Farming's tough. I think one of the big problems we see at the moment, and this is kind of going back to my earlier point, the price the farmers are getting at the moment they're looking at wheat is very low. The price they're looking at

8:11for milk is very low. And they're saying, well, what decision are we going to make? Like, I can't turn around and say, like, US farmers or Irish farmers, European farmers will go and say, we need more money from the government. And they might get a bailout from government. If I'm a farmer in somewhere else, sub-Saharan Africa or in East Asia, they're really going to struggle in the next 6-12 months because where's the bailout come from? Because they already are so subsidized with fertilizers and stuff like that. Going back to the question, you know, it all comes down to the strait. So the war is over two months old right now. And I think, like, you know,

8:41again, when we first started having conversations about the closure of the Strait of Hormuz, people were talking about $200 barrel oil in fairly short order. And, you know, it's not. It's not there yet. Explain this gap, how we have the, you know, the nightmare scenario for the oil market. And it's obviously up a lot, but it's not at $200. It's still in the low. I don't know what it is right now. It's somewhere in the low hundreds, depending on what benchmark you're looking at. Yeah, it's about $100 a barrel for oil. I mean, again, when, you know, I was listening recently,

9:12Fatih Birol, the head of the International Energy Agency, saying this crisis is worse than 1973, 79, and 2022 all put together. Then you look at the price of oil and I said, well, no, really. And then you look at the price of natural gas, the price of electricity, the price of coal, because we have this obsession with oil. First, you know, I raise my hand. I am obsessed with the price. Yeah, it's your fault, Javier. It is my fault. It's oil, crude oil, and olive oil. Those are my obsessions. Just don't get them mixed up. But, you know,

9:42the energy wall is much larger than oil. And for many, you know, right now, most of the energy that we are using is electricity. And electricity prices in Europe are, on average, about what they were, on average, 2025. So there is not a problem there. But you are right. People were expecting much higher prices. You have asked me a year ago, Javier, we have 60-plus days of the Strait of Hormuz closed, and this is all what has happened, and the war, and the missiles, and so on. Probably we'll have said, well, oil starts with a 200,

10:14and we are at 200 and something. Why we are not there? I mean, bypass pipelines have done a lot of work. We have used the strategic petroleum reserves of everywhere, other than China. We are drawing down inventories at a very fast pace, and I do think that perhaps what I underestimated is the amount of demand destruction that we have seen already. Somehow, we have managed to reduce demand by probably about 5 million barrels a day, about 5%

10:45of the market, without really creating a lot of economic pain. And it's a bit unkind to put it this way, but for the global economy, for the stock market, it does matter where the demand destruction is happening. It's not the same that it happens, say, in Pakistan or Bangladesh, that it happens in Germany, as it was the case in 2022. So I think that those factors are, but we are creating a flow of supply

11:15using a stockpile. Yeah. That cannot go forever. That is, at some point, comes to an end, but it's lasting longer than I would have thought. You know, you mentioned electricity prices not being as high as you might have expected given everything that's going on. It's become a cliche, I think, to talk about Europe always facing one shock or another or Europe being the loser from whatever the latest crisis is. I'm sorry to our Europe-based audience. But,

11:45is there a difference between an oil shock versus an energy shock in Europe? There is, because, I mean, I think that we, in some ways, we have forgotten how bad 2022 was in terms of energy shock. I mean, take electricity and let's look at just the wholesale market and let's use the German contract as an average of Europe. Pre-2022 price say that it was 50 to 75 euros per megawatt hour. That went to

12:151,000 euros per megawatt hour. Now it's around 80. So, you know, not far away to really the normal level. Let's just kind of take a step back because I thought that to me the defining kind of picture of 2022 crisis, you cannot really picture electricity other than the pylons or a nuclear power reactor and so on. But to me, it was the electricity bills that people will post on social media or some small and medium enterprises will email to me

12:46and I do remember a French baker sending me his, you know, corner shop in the outskirts of Paris. Typically, his electricity bill came around 700 to 800 euros a month and it just went from that to about 7,000 euros a month. Wow. And we have not seen that, but electricity electricity is what really makes the world tick and particularly in the service industry, which is really what drives

13:16economic growth these days. And that's why the 2022 crisis was so destructive, particularly from an inflationary point of view because a lot of businesses were receiving electricity bills that they were bankruptcy events. I mean, either they increase prices and a lot or they will be out of business and we don't have that today and that is, that's the difference. I'm not, oil is very important because it permeates everywhere. I mean, as Lorcan was saying, if we have a food

13:46price in the next few months, it's going to be more because everything is more expensive to transport. So, you know, your groceries go on a truck to the supermarket. They may be on a plastic tray on the supermarket and that's going to be also more expensive. So, inflation will permeate, but electricity is a big deal and it doesn't really get the attention that it deserves. By the way, we should mention that because we don't know exactly when this episode is going to come out on the feeds that this is all occurring, what's the date? May 7th.

14:17May 7th. 7-14 British Summertime. We had a request from someone specifically to say British Summertime. So, here it is. Whoever made that request, that was for you. What summer? I know.

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Fertilizer Supply

17:42Lorcan, Javier mentioned, okay, maybe one reason that oil isn't as high as it was is because they're stockpiles. Yep. One of the episodes that we did sometime in early March that got a lot of people's attention was about fertilizer. I understand because I heard from someone that there is actually a fair amount of excess fertilizer right now that's cushioning the blow. Can you explain this to me? In Europe particularly, there is a nice bit of fertilizer right now and this is such a Joe story. It's brilliant because it's got

18:13European environmental taxes. Lorcan is the one who told me the story earlier so I'm setting him up to tell the story. There may have been a production being outside. So what we have in Europe, they brought in legislation a few years ago to support what's called the domestic fertilizer industry, European producers. European producers are very high cost producers and one of their biggest costs is they have to buy carbon credits for the energy that they use because it's hugely energy intensive to make fertilizer as we all found out in 2022 with the gas crisis. So those carbon credits have to be bought by European producers means that external producers

18:44outside of Europe have a competitive advantage because they don't have to buy carbon credits. So they're brought in this piece of legislation that's called the Carbon Border Adjustment Mechanism. Lovely acronym is CBAM because it hits you really hard. But we knew the 1st of January 2026 this CBAM tax was coming and it was going to put up to €120 per ton on urea coming in. Urea is nitrogen. So all the farmers in Europe said well we'll go buy a fertilizer in November and December when we'd never normally buy fertilizer. That is like the middle of winter you're not going to spend money on fertilizer.

19:14So it was a big boom in purchases in Europe of fertilizer in November and December of 2025. Up 60 to 80% of what they normally would be. So when we came into January very much like farmers had the fertilizer or merchants had the fertilizer up till about May or June of this year sitting in the yard. So much of the planting season has been taken care of the UK being outside the EU didn't have CBAM it has its own thing but it's not coming into the 1st January 2027. So the UK are a bit late to the party there I'm very sorry to say but Ireland and most of Europe like that so you see the import numbers December was the

19:46biggest number 60 or 80% higher than normally would be. so it's been a hugely beneficial tax in the very short term in the long term now once we get through those stocks we'll see that imported fertilizer coming in and it's going to be more priced because CBAM will be there but also if we look at countries that rely on Australia for most further nitrogen supply they are now shopping in North Africa and Algeria Morocco and Egypt where a lot of the European imports come from and those countries like India particularly are buying putting huge contracts

20:17to buy that supply so not only will there be CBAM on the imports there will also be more expensive fertilizers as well so again as Javier said and I'm saying this is not a crisis that's going away this is a crisis that's delayed and that's what we're seeing all the way through it. So we see stories now that especially in the US I guess maybe not so much here for reasons that you just outlined but you see stories saying farmers can't buy all the fertilizer they want at the price they want. Well yes. What does that actually mean? There is a global price for it I suppose if we step back

20:47to say pre-2026 the fertilizer supply for particular fertilizer like for nitrogen was a bit tight so we see prices were creeping up we go okay it's a bit tight we'll get through the next year we need to get some more supply online the fact you take 30% of it out straight away means there's a fight on for what's there and US farmers generally like farming is an incredibly tight margin business we're looking at margins of like less than 1% generally year to year so if you get prices go up by 10% you're kind of going is it worth planting this year

21:18so when the farmers are giving out complaining as you say like they're never happy they have good reason not to be happy because they look at they have good reason to be unhappy so I look at the farmers in the US they're saying they can't get the fertilizer they want the price they want well the price they want is free and all of it is free but they have a cost benefit analysis built into their system they can pay $450 for nitrogen they can't pay $700 for nitrogen and it's simple as that almost everything in finance is a spread

21:49you have the price of corn you have the price of fertilizer and you need to look at the ratio what is different in 2022 is that the fertilizer price increased a lot but the price of corn also increased a lot so you're a farmer you were taking a hit on the cost but you were benefiting from a high price fertilizer went more or less what Lorcan was describing for $400 to $800 a ton but corn prices went from $4 to $8 a bushel this time corn prices

22:20have barely moved they're at $4.5 a bushel and the price of fertilizer has gone through the roof so that spread is effectively negative to the farmer that's what for American farmers this crisis feels very different to 2022 because their cost is up but their potential profit is just down I think it's important to bring back to my topic the farmers again the other products that farmers make dairy farmers are in real trouble because we've seen global milk

22:50supply up 5% last year we've seen some European countries up 7% so far this year as well so the price of milk has gone below the price of production in the beef side we have huge beef prices which are great but farmers don't have cattle to sell the reason the price has gone up so much because particularly the cattle in the US has been in 75 years can you explain this is a source of a lot of controversy the cattle specifically because some people want to blame the processors or whatever give us your diagnosis of beef prices there are too few cattle and too

23:21much demand thank you Lorcan for that insight the lines on the chart cat on red meat yes first of all I don't want to ever defend one of the big four meat processors but they are losing money hand over fist processing beef at the moment I saw Tyson results around the other day they lost 150 million dollars in three months processing beef so it's very hard to see how they're making a killing doing that because clearly they're losing money but the problem is there are not enough cattle to be killed the retail

23:53price hasn't gone so everyone's competing for the cattle that are there to go to slaughter the retail price has moved a lot but hasn't moved enough and we're getting to a place now in a lot of markets where we're starting to see demand destruction happen so I suppose the time between you're buying the animal and the animal goes to market you're going to be caught a little bit in that but also I think it's very important for people outside the industry if you kill a steer you don't have one customer for that you've got 25 different customers like the US is one of the largest importers of beef in the world and one of the largest exporters

24:23so you go how's that work because the US people love to eat minced or ground beef you call it that's what you eat ground meat the rest of the world likes steaks and stuff so you're importing and exporting different bits of meat so the steak business is at a different price to the ground meat business so you have all different things happening but the fundamental problem is there are not enough cattle supply and demand Javier I want to segue to