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High natural gas prices, if sustained through early 2022, will
translate into higher food costs and reinforce an inflationary
trend in this sector that is already being driven by supply chain
disruptions, labor shortages and increased demand from the biofuels
sector.
We have already seen cutbacks in fertilizer production in
Europe which is creating a tight situation for CO2 production, a
by-product of fertilizer production. This will impact aspects of
the food supply chain that need CO2 in meat, frozen vegetable and
beverage production.
High natural gas prices have already filtered into the
fertilizer market with nitrogen fertilizer prices at historically
high prices relative to nitrogen dependent crops such as corn and
in the EU wheat.
The task of the agricultural markets from here will be to keep
prices high enough to the farmer for nitrogen intensive crops such
as corn to maintain economics that are favorable to corn production
relative to other crops.
But, the good news is that at least from a Northern Hemisphere
perspective farmers will not need to make a planting decision until
the March-April 2022 time-frame and crops including corn will be
available from the Southern Hemisphere beginning in May. So there
is time for the natural gas market to adjust. But, it does mean
that 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.
Influence of the Ammonia market
European ammonia prices are currently close to $700/t, which is
getting to the upper end of any acceptable range. Only once have
they got almost to $1000/t (Q4 2008 with the financial crash). So
whilst we don't know exactly where the ceiling will be, we can
confidently say that the closer the price edges to $1000/t the more
demand destruction there will be.
As CF Industries has, at current gas prices, shut both its
ammonia production and its downstream
nitrates / NPK production in the UK, by definition at current gas
prices demand destruction is happening for fertilizers in Europe,
as CF's clear conclusion has been that if they produced fertilizer
based on $22/MMBtu gas they would not be able to sell it profitably
- i.e. the market won't take it.
Some fertilizer producers might opt to buy ammonia from
lower-cost regions and continue to produce. That suggests (in the
European context) that the fertilizer market will stand European
gas prices of around $18/MMBtu (= $680 ammonia - current import
price). So the tipping point in terms of ammonia prices is a little
north of $680/t but not much further - for which there is clear
evidence.
In Europe (as with North America) we're approaching / in the
autumn application season for crops such as winter wheat. Some of
this will already be committed. At current fertilizer prices (bear
in mind both phosphates and potash are also extremely high at
present) we are confident that farmers will reduce autumn
application volumes. If prices reduce then they could take larger
spring volumes and compensate then. However if prices do not
reduce, we would expect it to translate into a yield reduction for
the winter-sown crops, and clearly if it extends into the spring
for those crops as well.
Lower yields should translate into better crop futures prices,
which in turn would buttress fertilizer prices through next
year.
History suggests quite firmly that farmers are not prepared to
buy 'normal' volumes at current price levels for fertilizers. The
last time potash prices were at current levels for a sustained
period (2009) global annual demand almost halved. When the ammonia
price hit the high $900s in 2008 there was, quite literally, no
market for 6 weeks and when it did open up prices had come down
significantly. This unfortunately means that any expectation that
downstream food prices might enable fertilizer demand to remain
strong is unlikely. The risks from doubling or trebling Farmers'
fertilizer costs are too severe - the crop can still fail because
of issues like the weather.
