Consumers around the world have already started to feel the effects of the global natural gas crisis and soaring prices in Europe and Asia. European households pay much higher gas and electricity prices, while nearly half of American consumers brace for a 30% jump in winter energy bills as they primarily use natural gas for heating.
The pain for consumers will not end with higher energy bills in the winter. Soaring natural gas prices have also triggered higher food and fuel prices around the world. Both are expected to jump over the next few months, in part due to the indirect effect of record gas prices, which reduce production of critical components for the food industry and agricultural raw materials.
“The bitter cold of this winter could be felt far, long and everywhere,” wrote the Wall Street Journal’s Jinjoo Lee in a item this week.
Indeed, the surge in gas prices does not only directly increase the energy bill of households. They are also having an indirect impact on the global food supply chain, the effects of which could still be felt as far as next year. This is because of the reduced production of fertilizer which would lead to a smaller supply and could influence farmers’ decision on which crops to plant next year in an effort to reduce the pain of high fertilizer costs.
In mid-September, giant European companies, from chemicals and mining to food, said sky-high gas and electricity prices were hitting their profit margins and straining some of them reduce operations.
Related: Fund Managers Throw Their Weight Behind the Oil Price Rally Declining fertilizer production not only drives up fertilizer prices, but it also affects the food supply chain, as ammonia and nitrogen production contains carbon dioxide (CO2) as a by-product. . CO2 is widely used in the food industry to make carbonated drinks and in the packaging of perishable foods.
For example, CF Industries, a manufacturer of hydrogen and nitrogen products, noted in mid-September that it was shutting down operations at its manufacturing sites in Billingham and Ince in the UK due to high gas prices.
The Billingham plant produces carbon dioxide, so the UK government has obtained a short-term contract with the company, which produces 60 percent of the UK’s CO2, to ensure continued supply to businesses and avoid food shortages.
“Soaring natural gas prices have led to the closure of fertilizer factories and has many implications, not only for the industry, but for farmers and the global food supply,” Deepika Thapliyal at Independent Commodity Intelligence Services (ICIS) noted Tuesday.
âThe rise in energy prices, particularly coal and natural gas, has sharply increased the costs of agricultural inputs. This includes fertilizers, which have increased by more than 55% since January, with several fertilizer manufacturers halting or reducing their production capacity, âthe World Bank said. noted in its Commodity Markets Outlook this month.
“If energy and fertilizer prices do not stabilize next year as expected, food prices would come under upward pressure,” the bank said.
In Europe, “Stifling Gas Prices” Make Ammonia and Fertilizer Production Uneconomic, Says Industry Association Fertilizers Europe noted at the beginning of this month.
“If prolonged, this situation will lead to a drop in European fertilizer production and a tight market situation which could affect agricultural yields for next year,” added the group.
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The European Commission presented a toolkit on October 13 to deal with soaring energy prices, but that “does not solve the immediate crisis,” Fertilizers Europe said.
âSoaring energy prices lead to reduced fertilizer production, higher input costs for farmers and, in turn, soaring food prices. But the fertilizer industry isn’t just about plant food. Our industry is also a key supplier of AdBlue for heavy goods vehicles, CO? sourcing for the meat and beverage industries to name a few â, noted Jacob Hansen, Managing Director of Fertilizers Europe.
China, for its part, would started restricting, or at least watch closely, its fertilizer exports, which further tightens global supply and could lead to additional food price shocks.
The tightening global fertilizer supply will not spare U.S. farmers either, analysts say. Corn, wheat and oat crops are sensitive to the amount of fertilizer used. In addition, a more expensive and smaller supply of corn, for example, would increase the price of ethanol used for blending with gasoline in accordance with the US Renewable Fuels Standard (RFS).
Overall, record natural gas prices will increase heating bills this winter, steak prices next spring, and fuel prices next summer.
By Tsvetana Paraskova for OilUSD
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