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Could high fertiliser prices create food shortages?

Global fertiliser prices have skyrocketed even further in recent weeks. From the outset of war in Ukraine up to the end of March, Rabobank senior agricultural analyst Wes Lefroy said global urea prices increased in the vicinity of 70 per cent in US dollar terms, di-ammonium phosphate (DAP) by 50 per cent, and potash (MOP) by approximately 40 per cent. “Now, it’s not only farmers concerned about the impact on yield – consumers too are starting to wonder what this will mean for food prices and availability,” he said

Mr Lefroy said the good news is we expect the immediate impact of high fertiliser prices and supply uncertainty on crop production is limited, for a number of reasons.

“Fertiliser prices typically follow crop prices higher, with crop farmers across the globe incentivised to buy more fertiliser to produce higher yields when crop prices rise. When demand for fertiliser rises, prices follow. This relationship is distorted when supply issues, rather than increased demand, cause fertiliser prices to rise. In the past 12 months, Chinese export restrictions and Russia’s invasion of Ukraine are examples of such supply distortions,” he said.

“Still, our margin estimates suggest farmers will have the flexibility to chase yield. For example, we’ve estimated that French wheat farmers will have increased nitrogen costs of 232€/ha, while revenues are likely to increase 882€/ha, assuming average yields, compared with the 10-year average. We expect a similar story in the US Midwest, where corn farmers are facing increased nitrogen costs of 252USD/ha with increased revenue of 1,100USD/ha, compared with the 10 -year average of both.”

According to Mr Lefroy in Australia, where local crop prices haven’t risen as fast as those globally, margins are likely to be tighter than these global estimates, but still positive.

“The second consideration is timing of fertiliser procurement. In the northern hemisphere, for example, farmers are about to plant their crops, so most of the fertiliser is either in the field, on farm or with the retailer, therefore, for this season at least, supplies look to be secure,” he said.

“The southern hemisphere is where our concern lies, particularly for potash supply in Brazil, where it is the country’s most important agricultural nutrient. Furthermore, Brazil is the world’s largest importer of fertiliser and imports 40 per cent of its potash needs from Russia. We estimate a shortfall of five million metric tonnes of potash in Brazil needing to be filled before July.”

Mr Lefroy said Australian farmers are also exposed given they are at the beginning of the import season for urea, with 65 per cent of Australian imports arriving between March and July. “We expect local supplies will be available, but supply risk is higher than usual.

“Even if farmers opt to use less fertiliser this year due to the higher prices, history suggests this does not have a direct impact on yield. In theory, farmers can ‘mine’ their soil for phosphate and potassium (potash) for a year in lieu of fertiliser applications, although this is not possible with nitrogen,” he said.

Mr Lefroy said in 2008/09, when fertiliser prices and commodity prices were at similar levels, US farmers cut fertiliser applications by 34 per cent in the first year, and four per cent in the second, with no yield loss. “It was a similar story in Australia. In 2009, nitrogen sales here fell year-on-year by four per cent phosphate by 22 per cent and potash by 27 per cent, yet yields were stable,” he said.

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