Energy and Fertilizer Prices Key Risk to Food Prices

Energy is a key pricing determinant of many components for human sustenance and existence. Food prices, both directly and indirectly are impacted significantly by energy prices. While media and politicians in the west tend to focus on energy for comfort pricing; driving, heating and cooling it impacts the most basic of necessities, food dramatically. This is risk heavily weighted towards the financially imperiled countries, the surging US dollar in 2022 highlighted this.

Food prices have eased but are expected to remain high by historical standards. Food prices have reversed sharply after being almost vertical for the past year, world food prices as measured by the FAO Food Price Index fell for the seventh consecutive month in October.

What is mispresented or understood is just how important Energy is for food prices.

Most food commodities rely on energy, either directly through fuel or indirectly through chemicals, fertilizers or electricity. Directly we have seen oil, coal and natural gas prices soar since 2021. Prices were elevated before the Russian invasion of Ukraine and have screamed higher since, though oil and natural gas are now well off their highs. The effect on food prices is clear as they mirror those energy prices.

Indirectly energy prices have impacted fertilizer markets since 2021 to the point where they have become out of reach for many farmers around the world. Many farmers refused to pay the higher prices and opted simply to go without which impacted yields. Fertilizers are the most energy-intensive commodity group. The Russian invasion of Ukraine, who are both major fertilizer exporters, drove up prices already elevated due to COVID-19-related supply chain disruptions. Fertilizer prices jumped from March onwards after Western countries imposed sanctions on the fertilizer shipments from Russia and Belarus, key exporters, in the wake of Moscow’s invasion of Ukraine.

Russia is the dominant player in fertilizer markets. Russia and Belarus combined accounted for more than 40% of global exports of potash last year. Russia accounted for nearly 22% of global exports of ammonia, 14% of the world’s urea exports and about 14% of monoammonium phosphate (MAP).

The cost of energy determines fertilizer prices, coal and natural gas prices directly affect these output prices. The world’s three main natural gas hubs, Europe, the United States, and Asia have projected prices averaging 148, 71, and 71 percent higher, respectively, in 2022 than in 2021 according to the World Bank.

Several companies in Europe, temporarily shut fertilizer production facilities due to surging input prices and/or the unavailability of feedstocks. Norway’s Yara International AS A, one of the world’s largest fertilizer companies, said that it was now operating at 65% of its European ammonia capacity in November. Commodity research firm CRU International Ltd said that “European fertilizer output is now at about 63% of total capacity, having previously stood at around 37% at the start of October.’ ‘ The increase is directly related to the fall in natural gas prices. European benchmark gas prices are around €125 a megawatt hour, down from almost €350 in late August.

The continuation of restrictions on fertilizer exports from the Black Sea region, sanctions on exports from Belarus, and China’s fertilizer export ban all pressure prices. If energy and fertilizer prices do not moderate in 2023 and 2024 as expected, food prices could remain elevated.

Crop nutrients manufacturer Omnia says prices of fertilizer input materials have risen by between 200% and 400% since January 2021.

Poorer countries, with their buying power already slashed with the higher US dollar are the most vulnerable. Reuters reports “aid agencies have warned that African smallholder farmers could be forced to reduce plantings of staple grains such as maize due to high fertilizer prices, worsening a food crisis in a region where millions have already been plunged into extreme poverty by COVID-19, armed conflicts and climate shocks.”

Effect of Higher Input Costs on Farmers

Closer to home in the U.S. a recent report by the Agricultural and Food Policy Center (AFPC) at Texas A&M University shows higher input prices are having a larger impact on farmers than originally thought.

  • Net cash farm income on the representative feed grain and oilseed farms is projected to decline by an average of $534,000 from 2021 to 2022 across the 25-feed grain and oilseed farms.
  • Representative wheat farms face an average reduction in net cash farm income of $399,000.
  • Representative cotton farms face an average reduction in net cash farm income of $716,000.
  • Rice farms face the largest reduction in net cash farm income per farm at $880,000 and a per acre reduction of $442.

This impact is much more dramatic with farmers that have less access to finance, large domestic markets and subject to currency risk.

Russian Replaced China as India’s Fertilizer Supplier with Huge Discounts

The sanctions have had an indirect affect however as Russia seeks to offload its stock to receive currency. Russia overtook China to become the biggest fertilizer supplier to India in the first half of the 2022/23 fiscal year by offering discounts over prevailing global prices. India’s fertilizer imports from Russia surged 371% to a record 2.15 million tonnes in the first six months of the year started on April 1, a senior government official who was closely monitoring the imports, told Reuters.

“India sometimes got discounts of more than $70 per tonne over global prices. Russia got a big buyer who can replace European buyers.”

While critics in the plush offices in Washington and New York criticize India for not adhering to sanctions imagine where these prices would have gone should India not purchased Russian fertilizer? Imagine how many people would have been starving. Unintended consequences are ignored by the political and media elite. Consequentially the severe risk of energy to food is largely unknown to the wealthy peoples of the world.

The World Bank’s Food Price Index declined 12% in the third quarter of 2022 (q/q) after reaching an all-time high in April. The index remains almost 20% higher than a year ago. This price rise is more significant in domestic currency terms with much of that pullback in prices offset by currency deprecations. The World Bank expects food prices to fall 5% in 2023 before stabilizing in 2024. Despite the expected declines, most food prices will remain high by historical norms. Clearly the forecasts are also subjected to numerous risks.

Source: Omnia, World Bank, TC, WSJ, Reuters