New surge in food prices could be triggered by European fertiliser crisis

English2021. nov. 9.Növekedés.hu

Skyrocketing gas prices this year brought about a major crisis in the European fertiliser market, gas being the main cost factor in the sector. Factories are closing down one after the other because of the uncertainty of the situation, which can lead to a shortage of fertilisers and ultimately higher food prices.

An extraordinary situation has developed in the European fertiliser industry in the autumn, as the price of natural gas, the most important input for production, has become unpredictable. 

Gas can account for 75-80 percent of the production costs of the most widely used nitrogen fertilisers in agriculture, making it a crucial factor in the production process. 

However, the current global energy crisis led to such a dramatic rise in gas prices in a short period of time that it has made production unpredictable and, in addition, pushed up the prices of phosphorus and potassium fertilisers. 

Lower stocks than usual, declining Russian deliveries, the effects of colder weather and supply chain disruptions all played a key role in the surge of gas prices. Last year, the price of gas was still at a low of 3 euros per megawatt hour, whereas this autumn the price already exceeded the historic level of 100 euros and jumped even higher from time to time. Although some forecasts project a somewhat lower price of 85-90 euros per MWh for the coming months, this would still be three to four times higher than the average gas price last year.

Fertiliser factories are closing down 

Staggering price volatility and price fluctuations have led to a number of European producers to announce that they are to stop fertiliser production and significantly reduce capacity utilisation, while the European Fertiliser Manufacturers' Association has appealed to the European Commission and EU Member State authorities for market stabilisation measures.

Industry estimates suggest that in Europe there has been a loss in production of 500-800 thousand tonnes of nitrogen fertilisers so far and this amount could increase further if factories continue to curb their production for a longer period.

László Bige, owner of the only Hungarian nitrogen fertiliser plant market leader Nitrogénművek Zrt. of Pétfürdő, also recently spoke about the possibility of a temporary shutdown, but the company has not made any such announcement so far. 

The owner has, however, indicated that the gas crisis has forced them to raise the price of their products significantly. 

At Nitrogénművek, the price of gas has a fourfold impact on the price of the products, which means that an increase of one euro in the price of gas causes an increase of about four euros in the price of fertilisers. 

Staggering price increase by Nitrogénművek 

In early October, it came as a shock for Hungarian farmers that Nitrogénművek Zrt. was selling certain fertilisers at a price of around 200,000 forints per tonne. 

This is a horrendous amount considering the fact that according to the Central Statistical Office, in the same period last year the so-called lime-ammonium-saltpetre nitrogen fertilisers - including Nitrogénművek’s product containing 27 percent nitrogen (pétisó) -, cost an average of 53 thousand forints. 

This means that prices have risen almost fourfold in one year.

Industrial gas consumption may also be hampered by the fact that this winter is forecast to be colder than it was in the past few years leading to an increase in retail gas consumption in Europe, and the increased demand could have an upward effect on prices.

Therefore, it seems likely today that domestic farmers will have to settle for high fertiliser prices until next summer,

and most probably, due to the prevailing market conditions Nitrogénművek will not launch their Black Friday campaign at the end of this year, which in previous years allowed crop producers to purchase fertilisers at cheaper prices. 

It remains to be seen how domestic farmers will react to the new situation and whether they will be ready to pay the higher prices. Industry experience shows that this autumn there have been no serious problems with the supply due to existing stocks, so anyone who wants to buy fertilisers can still do so on the domestic market. 

At the beginning of next year, however, there might be problems with the supply of fertilisers to be used in the spring, as temporary shortages and logistical difficulties may occur. 

Nitrogénművek Zrt recently called on crop producers not to speculate on price reductions, but purchase the necessary quantities in due time.

Can import provide a solution? 

In today’s tense situation, the question arises whether Russian fertilisers could be used to a greater extent to make up for the quantities missing from the European market. It is well known that Russian fertiliser production is cheaper, as Russian companies have access to natural gas at much lower prices. However, experts say that Russian agriculture also consumes huge quantities of fertilisers, which significantly reduces the available supply. 

In addition, producers adjust the price of exported products to European market prices, so an increase in Russian fertiliser imports would not have a significant impact on the price situation, but on the contrary, the European situation could guarantee extra profits for Russian fertiliser producers and exporters. 

The crisis and uncertainty in the fertiliser market is dangerous from an agricultural point of view because without fertilisers it is not possible to produce efficiently today.

The quantities applied can be reduced through more professional and optimal use, but unjustified cuts in fertilisation also degrades the quality of the expected harvest.

Thus, for those who do not fertilise properly, the current yields of 8-9 tonnes of wheat and 10-12 tonnes of corn per hectare expected today will become unattainable.

On the other hand, farmers are trapped because if they purchase and apply the fertilisers needed from an agro-technological point of view, their production costs will increase significantly and this could jeopardize the profitability of farming despite higher yields.

The really bad news for everyone, however, is that any of these options could lead to higher prices for agricultural and food products. 

If average yields are lower next year, the supply could fall significantly, but if production costs rise, this could be a price driver on the world market. 

Higher crop prices, with further increases in feed prices, could also lead to higher prices for animal products, so that the current energy and fertiliser crisis could ripple through the entire food sector, with consumers ultimately suffering the negative effects.