High natural gas prices could lead to soaring food prices thanks to the fertilizer link

Global fertilizer prices have hit multi-year highs in recent months following soaring prices for key raw materials, natural gas and coal, and some export restrictions put in place by supplier countries. .

All over the world, natural gas is used as a feedstock as well as a fuel for the production of nitrogen fertilizers. In some countries like China, coal is gasified into ammonia and used to make fertilizer.

Nitrogen fertilizers are the most widely used fertilizers in the world. Ammonia, phosphorus and potash are the other important components of fertilizers.

According to European crop fertilizer company Yara Fertilizers, in several of their processing steps, natural gas, essentially methane, is upgraded by combining with nitrogen from the air to form nitrogen fertilizer.

“While 80% of the gas is used as feedstock for fertilizers, 20% is used to heat the process and generate electricity,” according to Yara.

Unsurprisingly, when natural gas prices rose, nitrogen fertilizer prices also soared. In fact, the prices of nitrogen – in the form of anhydrous ammonia, urea or liquid nitrogen, phosphorus in the form of diammonium phosphate or DAP and potassium in the form of potash – have all increased significantly over the course of the past year.

The ban imposed by China since September 2021 on the export of phosphate fertilizers to guarantee domestic supply has supported fertilizer prices. Russia also banned fertilizer exports soon after.

China, India, USA and Brazil are the world’s top fertilizer consuming countries and are also key producers of major agricultural commodities.

China’s ban and India’s fertilizers

China, the world’s top fertilizer supplier, has banned fertilizer exports and urged coal and natural gas companies to honor contracts signed with domestic fertilizer producers.

The effects of this ban are being felt in neighboring India.

India imports on average 60% of the 10 to 12 million tons of its annual consumption of DAP. According to a Reuters report in early December, 40% of that comes from China.

As India entered its winter or Rabi growing season in November, the demand for fertilizer in the country is expected to peak. The Reuters report mentions that cases have already emerged of Indian farmers facing delays or disruptions in fertilizer supply.

India produces all of its wheat during the winter planting season, as well as some oilseeds, pulses and maize.

India is also a fertilizer manufacturer and the country’s fertilizer sector depended on LNG imports for between 60% and 73% of its natural gas feedstocks from January to October 2021.

Data from S&P Global Platts Analytics showed that contracted LNG supply of 24.3 tpa covers just over half of India’s regasification capacity each year, suggesting that the country is relatively exposed to occasional LNG imports.

Spot LNG prices have jumped beyond the $11 to $12/MMBtu range deemed affordable for end users, Indian LNG importers told S&P Global Platts.

Indian importers could have exploited LNG on contract terms for the supply of the fertilizer sector. But these contracts are usually compared to Brent crude, the price of which has almost doubled in a year. The Platts-valued Dated Brent benchmark has trended over $70/bbl since October, rising from the $30-$40 range seen in early October to early December 2020.

JKM LNG spot prices assessed by Platts and TTF Europe exceeded $56/MMBtu and EUR 100/MWh respectively in early October. These prices have declined since the October high and were trading around $33/MMBtu this week.

Global Fertilizer Scenario

Fertilizer shortages and high prices are being felt around the world.

Due to rising natural gas prices in Europe, various fertilizer companies have been closed, raising supply concerns.

Yara Fertilizers said record natural gas prices in Europe were affecting ammonia production margins and as a result the company had cut production at several of its plants.

In the United States, input costs for farmers have increased with soaring fertilizer prices. The United States is the largest corn producer in the world, and corn is a fertilizer-intensive crop.

US corn growers have talked about switching to different crops such as soybeans or reducing their use of fertilizers in the next planting season if prices continue to be firm.

Soaring fertilizer prices are also expected to impact Brazil’s largest maize crop, which will be planted from this month.

When fertilizer price hikes will end is unknown, American Farm Bureau Federation economists said at their annual convention Jan. 8.

A report released by Texas A&M University in January echoed the view: “Regardless of the factors driving rising costs, the reality on the ground is that producers face the prospect of a huge increase in costs as we approach the spring 2022 planting season.”

Food inflation concerns

This comes at a time when food inflation around the world is already reaching multi-year highs. High fertilizer prices could eventually affect the cost of food produced.

“High natural gas prices, if sustained through early 2022, will translate into higher food costs and reinforce an inflationary trend already fueled by supply chain disruptions, labor shortages, and increased demand from the biofuels sector,” said an update from IHS Markit in October.

In 2021, the Food and Agriculture Organization of the United Nations Food Price Index averaged 125.7 points, up 281.1% year-on-year, and the highest of last 10 years.

Along with soaring prices, there are also concerns about the availability of fertilizers, which is likely to impact planting. If farmers reduce fertilizer use due to limited supply, this could ultimately put pressure on yield and production.

History suggests quite strongly that farmers are not prepared to buy “normal” volumes at current fertilizer price levels, according to the IHS update. “The last time potash prices were at current levels for an extended period [2009] global annual demand has almost halved,” he added.

If natural gas prices stay at current levels or rise, agricultural prices and especially corn will need to stay high to maintain needed acres and again this will fuel higher food prices, he said. declared.

About Marco C. Nichols

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