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

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2:23Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. 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. You 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 record.

2:57Absolutely. 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. Both 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.

3:34That'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. Take 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.

4:08I'm kind of halfway. It's okay now for gasoline and so on. I said that. 7.30 in the morning, please. I 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 is working it's uh every refinery in the planet is maximizing jet fuel production okay right now and we are beginning to see that working and 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 at from uni we're talking about changing their summer holidays to ferries and trains.

5:01So there's real life demand destruction happening already. You mentioned all of this depends on when the strait actually reopens. Why don't we just ask you that basic question? When do you think the strait will reopen? I 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 penurries over the population, and, you know, they at all don't face any imminent election.

5:42President Trump does face an election later this year, but the price of gasoline is going up. It's undeniable, four and a half dollars a gallon. It's more expensive, but still, if you look at American economies, 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 they are the president is suffering a massive economic crisis that he's going to force his hand to to concede to to Iran so we are in a really kind of bad situation you are hoping for a reopening that is painful but not yet really painful enough that everyone is forced to compromise and that's what I'm worried that is not getting painful enough.

6:26What 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. We are not there yet. So it may take longer. Lorcan. So again, for those who don't know Lorcan, not only a journalist, but actually long practicing farmer, someone who actually uh you know in the biz do we 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 reason we're in a different situation is the world's food supply 2025 into early 26 it's been really strong like the world is no out of it there is a lot of food the world is drowning wheat it is swimming in milk we have so much food out there one thing we're short of is beef and we know that the u.s beef prices have gone up big prices have up around the world but we've loads of chicken loads of poultry so there was 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 price we see some food price come up or driven by transport costs more than the cost of producing food it's the cost of transporting food from the farm to the factory to the shop that's driving with the price right now the problem's going to arise in six months and 12 months time when the decisions be made today about do i plant that field of wheat or do will I breed more cattle for next year?

7:46And farmers are going to say, no, we're not going to do that. If you look at the U.S. at the moment, forecast out we have the lowest wheat plantation in the U.S. total acreage ever. This is going back to date in 1919. 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 is 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 is much as the price of the burger.

8:13I have a farming question, a bit of a sidetrack. If this is about your Japanese knotweed, I have no answer to it. 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 for milk is very low.

8:43And they're saying, well, what decision are we going to make? I can't turn around and say, like U.S. farmers or Irish farmers, European farmers will go and say, we need more money from the government. And they might get a bailiff 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 bailiff come from? Because they already are so subsidized with fertilizing 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.

9:10And I think, again, 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 it's not. It's not there yet. Explain this gap, how we have 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 I was listening recently, Fatih Birol, the head of the International Energy Agency, saying this crisis is worse than 1973, 79, and 2022 all put together.

9:51Then you look at the price of oil and I say, 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, I raise my hand. I am obsessed with the price. Yeah, it's your fault, Javier. It is my fault. is oil, crude oil, and olive oil. Those are my obsessions. Just don't get them mixed up. But, you know, the 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 above what they were on average 2025.

10:28So 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 200, and 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.

11:07Somehow, we have managed to reduce demand by probably about 5 million barrels a day, it's about 5 % of 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 using a stockpile. That cannot go forever. That is, at some point, comes to an end, but it's lasting longer than I would have thought.

11:57You 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 is there a difference between an oil shock versus an energy shock in Europe? There is, because I think that in some ways we have forgotten how bad 2022 was in terms of energy shock. Take electricity and let's look at just the wholesale market and let's use the German contract as an average of Europe.

12:40Pre-2022 price, say, there was 50 to 75 euros per megawatt hour. That went to 1 ,000 euros per megawatt hour. Now it's around 80. So, you know, not far away to really the normal level. Or 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. And I do remember French Baker sending me his, you know, corner shop in the outskirts of Paris.

13:25Typically, 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 is what really makes the world tick. and particularly in the service industry, which is really what drives economic 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 increased prices and a lot, or they will be out of business. And we don't have that today.

14:10And 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 price 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.

14:45What's the date? May 7th. 7th. May 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?

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18:12JPMorgan Chase and Company. Lorcan, Javier mentioned, okay, maybe one reason that oil isn't as high as it was is because they're stockpiles. 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 European environment. Lorkin is the one who told me the story earlier.

18:47So I'm setting him up to tell the story. There may have been a production beaten outside. So what we have in Europe, they brought in legislation a few years ago to support what's called the domestic fertiliser 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 fertiliser, as we all found out in 2022 with the gas crisis. So those carbon credits have to be bought by European teams. It means that external producers outside of Europe have a competitive advantage, because they don't have to buy carbon credits.

19:19So they're bought 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 in and it was going to put up to 120 euros per ton on urea coming in, urea is nitrogen fertilizer. So like all the farmers in Europe said, well, we're going to 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. It was a big boom in purchases in Europe of fertilizer Is there in November and December of 2025?

19:51Up 60 to 80%. Wow. Of what the number 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 1st January, 2027. So the UK are a bit late to the party there. I'm very sorry to say. But not only in most of Europe, like that, so you still could get the input numbers. December was the biggest number, 60 or 80 percent 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 seaball 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 where Algeria Morocco and Egypt where a lot of the European imports come from.

20:44And those countries like India particularly are putting huge contracts to buy that supply. So not only will there be CBAM on the imports, there will also be more expensive fertiliser 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 fertiliser they want at the price they want. Well, yes. What does that actually mean?

21:15There is a global price for it. I suppose if we step back to, say, pre-2026, the fertilizer supply for a particular fertilizer, like for nitrogen, was a bit tight. So we see prices were creeping up. We go, OK, 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 net margins of like less than 1 % generally year to year. So if you get price to go up by 10%, you're kind of going, is it worth planting this year?

21:49So when the farmers are giving out, sorry, are complaining, as you say, like they're never unhappy, they have good reason not to be happy because they look at... You don't hold it against. No. No, no, you're joking. But they have good reason to be unhappy. So I look at the farmers in the US, they're saying they can't get the fertiliser they want, the price they want. Well, the price they want is free and all of it is free now. 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. And almost everything in finance is a spread.

22:21Sure. You 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. Fertilizers were more or less what Lorcan was describing, say for$400 to$800 a ton, but corn prices went from$4 to$8 a bushel. This time, corn prices have 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.

23:01That'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 worth, just to bring it back to my topic, the farmers again, because I love talking about farmers. The other products that farmers make, like dairy farmers are in real trouble because we've seen global milk supply up, I think it was 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 in the US the cattle in the US is the lowest it's been in 75 years actually 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 much demand okay classic thank you Lorcan for that insight the lines on the chart Cat on red meat 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 Tyson results were out there the other day They lost$150 million 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 price hasn't gone 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 We're starting to see demand destruction happen So that's what the time between you're buying the animal and your demo 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 world's largest exporters hmm so you go how's that because the u.s people love to eat mince or ground beef you call it that's what you eat ground meat the rest of the world likes steaks and stuff so you you're importing exporting different bits of meat so the steak business is at a different price to the ground meat business so you have all different kind of things happening but the fundamental problem is there are not enough cattle supply and demand supply and demand happy i want to segue to a big recent headline in the energy world which is the uae leaving opec and it's been a habit on the podcast to describe relations between the UAE and Saudi Arabia as frenemies for many, many years.

25:28However, I think we might be dropping the FR part fairly quickly. What does this all mean? I mean, this is the biggest challenge that I think OPEC has faced. I mean, typically, it's said that the four most dangerous wars in global finances this time is different. I think that the three most dangerous wars in analyzing the oil market are OPEC is dead. And I will say that it is not dead, it's really bleeding and bleeding badly. Many countries have left OPEC before. See if I can remember all of them. It was Indonesia, Qatar, Ecuador, and I'm missing, I mean, the UAE, and I'm missing one. I know that I'm missing one.

26:11It will come back to me. Angola. Sorry. I was going to guess that. I was going to guess. Sorry. I wish I said that. They were different for two, three important reasons. The UAE have the ambition to produce a lot more oil, and it has been very clear that they're about with a capacity of 4.5 million barrels a day, they want to go to 5 million barrels a day, and potentially higher. They have the geological endowment to produce that extra oil, and they have also the money to back the dreams that they have on producing more with money to build the facilities. So they will produce a lot more oil, and I think that that really brings a big challenge to Saudi Arabia.

26:51And if and when the Strait of Hormuz reopens, we can have a situation in which for a while there's going to be demand for the straw oil because global inventories are going to need to be replenished because a lot of countries are going to build larger strategic inventories. But at some point, you're going to see a raise for market share. And if we have a raise for market share, then everyone wants to produce more oil, then the price of oil has to come down. OPEC is as strong as their members' ability to endure financial pain, but withholding barrels from the market. Barrels that they can produce that they decide we are not going to put them on the market.