After the price energy crisis, a food shortage awaits the world

The multiple increase in gas prices in the winter of 2021-2022 in the EU and Britain not only actualised the discussion about the expediency of the so-called "green transition" in the energy sector, but also formed a situation of a delayed food crisis. It will demonstrate its peak in the autumn, during the harvest of the main crops, although its obvious manifestations can be observed already now.

And the EU's food security will be significantly affected by the export of fertilisers from China - if they will have their own sufficient capacities there. Anyway, food in Europe, the UK and the USA will rise in price, although the degree of appreciation remains an open question, due to the large number of task parameters.

Domino effect

In no more than a month, European farmers will have to start a sowing campaign, which means fertilising. The key in this area are nitrogen fertilisers, the production of which requires natural gas.

An increase in the price of natural gas entails an increase in the cost of fertiliser production – which means that farmers need to either put more expensive fertilisers in the cost of future products, or refuse to use them. This entails a decrease in yields, the occurrence of food shortages, and, again, an increase in prices for it.

According to VTB, the shortage of fertilisers on the European market in the first half of the year may amount to up to 7 million tons. According to information received by Bloomberg from European agricultural companies and fertiliser producers, in general, prices will rise by at least 10%, and the drop in yields for individual crops may be up to half of the norm.

"Food may get even pricier if harvests suffer or crop prices rise," the publication warns.

One of the effects that nitrogen fertilisers give is an increase in the ability of plants to tolerate dry periods. In Hungary, the use of nitrogen fertilisers will decrease by about 30-40% this season, local farmers believe, and if there is a drought again at the end of April and May, the effect may be even more devastating.

The yield of some crops can be halved without nitrogen products, says Zoltan Bige, director of strategy at the Hungarian manufacturer Nitrogenmuvek.

A decrease in the availability of nitrogen fertilisers, even if the weather is favourable, will lead to a change in the structure of food production, as well as its quality. Thus, the wheat that has been born without fertilisers will have a reduced nutritional value due to a decrease in the proportion of protein, which means that farmers will focus on products that are less sensitive to the presence of fertilisers.

Since autumn, at least 70% of Bulgaria's greenhouses have been decommissioned due to high electricity and gas prices. As a result, Bulgarian tomatoes and cucumbers have disappeared in the country, and fresh vegetables will have to wait until summer – or be sought on the world market.

Separately, it should be noted that according to the local Association of Greenhouse Producers, at least 10,000 people were laid off in the winter or are in the process of being laid off.

To save the industry from bankruptcy, greenhouse gas producers are demanding compensation for new gas prices. But there is simply no money for compensation in the Bulgarian budget today.

American corn farmers have been notified of the switch to other crops, such as soybeans. The date of the end of the increase in fertiliser prices is unknown, economists of the US Farm Bureau Federation reported during their annual congress on January 8.

It is worth noting that the European fertiliser market received several serious blows at once – and, in some cases, they were blows to themselves. In November 2021, the Russian government decided to limit the export of nitrogen and complex fertilisers for six months. Restrictions on the export of fertilisers will be in effect from December 1, 2021 to May 31, 2022.

In this case, we are not talking about reducing the available supplies, the quotas introduced are actually preventive, not restrictive, consolidating the existing status quo. The capacity utilisation of Russian fertiliser enterprises, given the dynamic growth of agriculture in the country, is close to 100% and restrictions will not have a critical negative impact on the business of Russian producers.

For example, the Russian export of fertilisers from December 2020 to May 2021 was higher than the level determined by government quotas by 0.9 million tons (14%), and complex nitrogen–containing complex - by only 1%. Taking into account the shortage of fertilisers in the EU, Russian exporters will be able to make additional profits without increasing the volume of supplies.

It is noteworthy that other major fertiliser producers - China, Turkey and Egypt - have taken similar measures aimed primarily at meeting their own needs.

The EU's own production of nitrogen fertilisers is unlikely to be able to fully recover from the price increase this year. According to preliminary estimates, at best it will be possible to meet up to 70% of the needs of the main EU economies - Germany and France. Coverage in the Black Sea countries, such as Ukraine and Romania, may be even lower, Bloomberg warns.

In June 2021, the European Union made another extremely irrational decision, taking into account the situation, and imposed sanctions against Belarus, which the United States joined in December. Now American observers in specialised agricultural publications have found that sanctions were imposed, in addition to the oil industry and the tobacco industry, against the production of potash fertilisers.

"Belarus is the third-largest producer of potash in the world, with just under 12 million metric tons (mmt) produced in 2019. The country accounts for 18% of the global potash production. In addition, Belarus was the second-largest potash exporter in 2019, delivering 10.3 mmt of potash to overseas market. This is about 21% of the global trade," writes Russ Quinn of the Progressive Farmer.

Great hopes for alternative supplies to the United States are pinned on Canada, which is also a major producer of potassium. However, there are doubts that the northern neighbour of the United States will have enough spare capacity.

Global crisis

The globalisation that has taken place has led to the fact that the rise in fertiliser prices caused by a number of sanctions, stock speculation and other irrational decisions will have an effect all over the world, from South America to India and Southeast Asia. According to the Wall Street Journal, although world food prices reached a ten-year peak in 2021, the growth will continue in the coming 2022 and 2023, and will be even more noticeable.

The WSJ calculated that December prices (2021) for Eastern European urea, a widely exported nitrogen fertiliser, were almost four times higher than the 2020 average. Diammonium phosphate, or DAP, a widely used phosphorus fertiliser, cost $745 per metric ton in December 2021, more than double the 2020 average price.

As in most similar situations, the weakest states from the point of view of the economy will suffer the most, where farmers cannot take out a loan for the current purchase of fertilisers to pay off after the sale of products. Thus, due to rising prices in sub-Saharan Africa, up to 30% of producers may lose access to fertilisers, which will lead to a loss of food production equivalent to the needs of 100 million people.

Coffee producers in Brazil, according to the WSJ, are already spending three times more on fertilisers than a year ago, and any drought will be fatal for them. Fertilisers can be purchased only by prepayment, and in a queue. To compensate for the increase in the cost of production, while maintaining the current level of solvency of the population, farmers need to sell at least 50% more products.

The increase in fertiliser prices is likely to affect the largest corn crop in Brazil, which will be sown starting this month. Corn generally refers to crops that require a large amount of nitrogen, which means there is every reason to expect its rise in price on a global scale.

It is characteristic that the WSJ, which expresses the interests of a significant part of the American establishment, fully supports independent analysts. In compliance with the requirements of European and American legislation, the Norwegian company Yara International ASA, one of the world's largest fertiliser producers, announced that it would stop supplying Belarusian potash by April.

"Belarus accounts for 20% of the world production of potash fertilisers, so it is obvious that they are an important supplier," executive director Svein Tore Holsether said in an interview. “If this part does not come out of Belarus, then I do not see anyone who would be ready to increase the volume.”

The pandemic, rising gas prices and other factors have led to the closure of a number of large fertiliser producers. CF Industries Holdings Inc., one of the world's largest fertiliser producers in the United States, cannot restore operations in the UK.

Having closed all the factories on British territory in September, in January the company was able to restart only one. The above-mentioned International reduced production by 40% and at the German BASF SE - according to various sources, the reduction was up to 30%.

There is really nothing to replace the volumes with. China, the world's leading supplier of fertilisers, after restrictions on the export of fertilisers, demanded that coal and gas companies prioritise the contracts signed with domestic fertiliser producers.

India imports on average 60% of 10-12 million tons of annual DAP consumption. According to a Reuters report published in early December, 40% of this volume is accounted for by China.

World gas prices will hit India very hard, where wheat production is concentrated in the winter months, with current peak prices. India is also a fertilizer producer, the country's fertilizer sector depends on gas imports by 60-73%.

How bad is it?

In November 2021, the last month for comparable data, average food prices across the EU have already increased by 2.9% year-on-year, according to the statistical agency Eurostat. In many Central and Eastern European countries, growth was much higher - 5.4% in Hungary, 6.1% in Poland, 6.2% in Romania and 6.8% in Bulgaria. Given the large number of regulatory mechanisms, such food inflation figures look threatening for Europe.

Many EU countries are already introducing state regulation of food prices. In Hungary, the prices of sugar, flour, milk, vegetable oil, pork and chicken breast will be reduced to the level of October. Applicants for EU membership Serbia and North Macedonia have also frozen the prices of bread, sugar and sunflower oil.

Poland, Romania and the Czech Republic are considering the possibility of reducing VAT rates on electricity and gas, which may indirectly reduce prices in supermarkets. Polish Prime Minister Mateusz Morawiecki also wants to abolish VAT on food products and fertilisers.

EU finance ministers in December 2021 decided "under certain conditions" to give governments the opportunity to reduce the tax on food to zero, and now Morawiecki is seeking approval from Brussels to implement this measure.

In Russia, despite the absence of problems with gas and fertilisers, since the beginning of 2021, food inflation, according to Rosstat, amounted to 10.62% and non-food inflation - 8.58%. Services have risen in price by almost 5% over the same period.

This significantly exceeds the set level, as well as indicators that demonstrate the states that are obviously in the worst, in terms of access to the necessary resources. It can be concluded that at least food inflation in Russia is caused by factors that lie outside the availability of gas, potassium and other minerals.

Taking into account the solidary opinion of a number of Western analysts, as well as the observed trends, we can expect an average global increase in food prices by a double-digit percentage - one of the peaks of growth will be observed at the end of this year.

It seems advisable to take measures in advance to "unlink" prices in the domestic market from the external environment, as well as to constantly monitor the availability and cost of at least the basic food basket. Otherwise, the inflation target of 4-4.5% set by the Central Bank by the end of 2022 may not be achieved with all the resulting negative consequences for the country's population.