In this list
Agriculture | Energy | LNG

High natural gas prices could lead to spike in food costs through fertilizer link

Agriculture | Biofuels

Potash Futures

Energy Transition | Carbon | Emissions | Renewables

COP28: The Policies

Oil | Energy Transition | Energy

APPEC 2024

Agriculture | Grains

Storm in Black Sea floods Azov port, delays grain shipments

Energy | Oil | Crude Oil

Bakken Crude Price Assessment

Agriculture | Biofuels | Refined Products | Diesel/Gasoil | Gasoline | Oil & Gas

Cellulosic waiver credits in the spotlight as D3 RIN prices remain high

For full access to real-time updates, breaking news, analysis, pricing and data visualization subscribe today.

Subscribe Now

High natural gas prices could lead to spike in food costs through fertilizer link

  • Featuring
  • Shikha Singh    Hwee Hwee Tan
  • Commodity
  • Agriculture Energy LNG
  • Topic
  • Food Security

Global fertilizer prices soared to multi-year highs in the past few months following surge in prices of key feedstocks natural gas and coal, and certain export restrictions put in place by supplying countries.

Around the globe, natural gas is used as a raw material as well as fuel for nitrogen fertilizer production. In some countries such as China, coal is gasified into ammonia and used for manufacturing fertilizers.

Nitrogen fertilizers are the most used fertilizers in the world. Ammonia, phosphorous and potash are the other important fertilizer components.

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

"While 80% of the gas is used as feedstock for fertilizer, 20% is used for heating the process and producing electricity," according to Yara.

Unsurprisingly, when natural gas prices rose, prices of nitrogen fertilizers also shot up. In fact, prices of nitrogen—as anhydrous ammonia, urea, or liquid nitrogen, phosphorus as diammonium phosphate, or DAP, and potassium as potash—all gained significantly over the past year.

China's ban since September 2021 on exporting phosphate fertilizer to ensure domestic supply supported fertilizer prices. Russia also banned fertilizer exports soon after.

China, India, the US and Brazil are the world's top fertilizer consuming countries and are also key producers of major agricultural products.

China's ban and fertilizers in India

China, the leading fertilizer supplier globally, banned exports of fertilizers and urged coal and natural gas companies to fulfil contracts signed with domestic producers of fertilizers.

The effects of this ban are seen in the neighboring country, India.

India imports an average 60% of the 10 million-12 million mt of its annual DAP consumption. According to an early-December Reuters report, 40% of this comes from China.

As India entered its winter or Rabi cropping season in November, demand for fertilizers in the country is likely to peak. The Reuters report mentioned cases have already emerged of Indian farmers facing delays or disruptions on the fertilizer supply side.

India produces all its wheat in the winter sowing season along with some oilseeds, pulses and corn.

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

S&P Global Platts Analytics data showed contracted LNG supply of 24.3 mt/year cover just over half of India's regasification capacity each year, suggesting the country has a relatively large exposure to spot LNG imports.

Spot LNG prices have surged beyond the $11-$12/MMBtu range deemed affordable for end-users, India's LNG importers told S&P Global Platts.

Indian importers could have tapped contracted term LNG for supply to the fertilizer sector. But these contracts are typically benchmarked against Brent crude, the price of which has almost doubled on year. Platts-assessed Dated Brent benchmark has been trending at above $70/b since October, up from the mid-$30s to mid-$40s range seen from early October to early December in 2020.

Platts-assessed JKM spot LNG prices and Europe TTF soared past $56/MMBtu and Eur 100/MWh, respectively, in early October. These prices have eased since peaking in October and were trading at around $33/MMBtu this week.

Global fertilizer scenario

Fertilizer shortages and high prices are being felt across the globe.

Owing to the higher natural gas prices in Europe, various fertilizer companies were shut, leading to concerns around supply.

Yara Fertilizers said the record high natural gas prices in Europe are affecting ammonia production margins, and as a result the company curtailed production at several of its plants.

In the US, input costs for farmers have gone up with fertilizer prices soaring. The US is the largest producer of corn globally and corn is a highly-fertilizer intensive crop.

US corn farmers have talked about moving to different crops such as soybeans or reducing their usage of fertilizers in the upcoming planting season if prices continued to be firm.

Soaring fertilizer prices are also likely to impact Brazil's largest corn crop, which will be planted starting this month.

An end date to higher fertilizer prices is unknown, American Farm Bureau Federation's economists were quoted saying during their annual convention Jan. 8.

A report released by Texas A&M University in a January echoed the view, "Regardless of the factors driving the increase in costs, the reality on the ground is that producers are facing the prospect of a huge increase in costs going into the 2022 Spring planting season."

Food inflation worries

This has come at a time when food inflation globally is already at multi-year highs. The high fertilizer prices could eventually reflect in the cost of food that is produced.

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

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

Along with soaring prices, there are also concerns around fertilizer availability, which is likely to impact planting. If farmers cut back on the usage of fertilizers due to tight supply, this could ultimately put pressure on yield and production.

History suggests quite firmly that farmers are not prepared to buy "normal" volumes at current price levels for fertilizers, said IHS' update. "The last time potash prices were at current levels for a sustained period [2009] global annual demand almost halved," it added.

If natural gas prices are sustained at current levels or go higher, agricultural prices and especially corn will need to stay high to maintain needed acres and again, this will feed into higher food prices, it said.