Societe Generale talks to Gro Intelligence CEO Sara Menker
At a recent SG virtual client conference, Societe Generale’s Head of Commodity Research Michael Haigh sat down with Sara Menker, CEO of GRO Intelligence, the innovative company she founded that amasses commodities data and uses machine learning to better understand the world’s agricultural trends. The discussion was illuminating on the dynamics behind greenflation and the agricultural sector in general.
We highlight below three of the main takeaways from their discussion.
Threat to Europe’s Breadbasket
Highlighting the impact the war in Ukraine is having on commodities in the region, Menker said the most significant impact is being felt upon global wheat production. Ukraine, Russia and the Black Sea region combined are responsible for about 15% of global wheat production, and roughly 30% of global wheat exports. The current conflict in Ukraine could very likely impact North Africa and the Middle East, the two of which rely heavily on wheat imports from the Eastern European region. This effect, in combination with the extreme drought currently being experienced in the Middle East, particularly Egypt, which is impacting local wheat production as well, will predictably raise inflation on food in the region, she said.
Current Inflationary Pressure Upon Agriculture
Menker pointed out that in recent times, supply and demand-side shocks are happening simultaneously across agricultural products, from proteins to grains. Supply shocks have been due largely to climate and weather-related events. She said demand shocks, on the other hand, have resulted as demand has grown much faster than anticipated, despite global COVID lockdowns. Adding to the pressure on the agriculture industry as a result of these supply and demand shocks is the rising cost of fertilizer (closely linked to the cost of natural gas) which has spiked dramatically in recent years. In many regions — including the US — nearly a third of the price of agricultural production is dictated by that of fertilizer.
These occurrences, taken together, are creating inflationary pressure across the agricultural sector. According to Menker, because of the thin profit margins of agricultural production companies — which are only supported by a constant increase in demand — there is a looming possibility that a slight drop in demand could lead to precipitous drops in price. When this tipping point might occur, Menker said, is not clear at the moment.
Threat to Crops from Rising Temperatures
Menker believes that environmental changes in the agricultural sector can potentially be addressed through innovation, like with the genetic manipulation of seeds and products in development. If certain damage to the agricultural ecosystem is irreparable, as many scientists are expressing with greater certainty than ever before, we need to take steps to be more resilient. Longer-term capital allocation to our food systems and agricultural markets is essential and must be considered if we wish to mitigate climate change. We will have to learn to alter our thinking to plan for agricultural needs farther into the future, she said.
Menker stressed that we can take away at least one optimistic view of the current agricultural outlook: that there is opportunity in the difficulty ahead. In order to preserve our agricultural system we’ll need to collectively harness the willpower to make the necessary changes to address those challenges proactively.