- Agricultural economics threatened by nitrogen deficiency
- There is no guarantee that farmers will increase the sowing area
The Food and Agriculture Organization of the United Nations (FAO) recently revealed that FAO’s food price index has reached its highest level since its inception, reflecting record highs for vegetable oil, grain and meat sub-indexes.
This is not surprising to supermarket shoppers, but the global shortage of food and livestock feed is due to the simultaneous rise in prices of nitrate fertilizers and other necessities, which puts the agricultural economy at a complete disadvantage. It can get worse. Prices began to rise in the final quarter of 2021 as the prices of the gas needed to produce ammonium nitrate began to skyrocket.
The Ukrainian invasion exacerbated the situation. The Black Sea region, sometimes referred to as the “European bread basket,” is in a state of turmoil, and the longer the hostility, the more likely it is that the winter planting schedule will be disrupted.
Russia is a major exporter of nitrogen fertilizers, and neighboring Belarus is also subject to western sanctions and is another major fertilizer producer. Recent estimates of ammonium nitrate in the UK are three to four times higher than they were 12 months ago, so some farmers simply reduce the use of fertilizer, thereby reducing yields. In the United States, farmers are even moving to crop switching.
Saxo Bank analysts said, “The recent rise in US natural gas prices has further increased the cost of fertilizers, which has allowed US farmers to turn more acreage from wheat and corn into less nutritious soybeans. There is a possibility of switching. ” They added that the US war, drought and heat caused three-month corn and wheat futures to rise again, “challenge to record highs in March.”
Transportation costs are pushing up input prices, labor shortages, and the impact on people living in poor countries remains significant, but high prices may continue next year for UK households.
Hungry, financial resources
Food insecurity is rampant in developing countries and is exacerbated by the fall against the US dollar, the international standard for soft commodity prices. It is worth noting that nothing has had a greater destabilizing impact on emerging economies and frontier economies than food shortages.
It’s no coincidence that hunger is associated with the historically popular uprising. Recent anxieties in Sri Lanka, Pakistan and Peru highlight risks. Even more worrisome, the potential for a serious food crisis in the Middle East and North Africa (MENA) can help destabilize already difficult areas.
Beyond these regions, there are risks around the commodity trading system itself. Goldman Sachs analyst Jeff Curry points out in this week’s memo:Financial risk [global financial crisis],” He said.
Delivery in this sense is related to futures contracts and their surrounding financial risks. Lenders to trading houses and other market participants are usually isolated from risk due to the underlying value of the commodity, so if these cannot be delivered, the transaction can be dry.
For investors, events in the coming months are existing assumptions about how the agricultural sector reacts when food costs rise as a percentage of consumer spending, especially the level of investment according to price dynamics. May challenge. Supermarket purchases in the UK have already fallen by 6% overall compared to last year.
The unprecedented spike in input costs means that there is no guarantee that farmers will increase the sowing area as they normally would.
Therefore, the purchase of seeds, pesticides and fertilizers may be curtailed to some extent in the future without further government intervention. It is also possible that more land will be transferred to crops that extract nitrogen from the air, such as legumes, and thrive on nitrogen-deficient soils. Supplementary sowing of plants such as red clover and thistle can also improve soil quality and, in the latter case, is a viable alternative to other forms of cattle feed.
A recent analysis by Peel Hunt reveals how much other sectors can be affected by the high-priced environment.
Food security concerns are at the forefront, and it is calm to know that Russia accounts for 23 percent of the world’s ammonia exports, 14 percent of urea and 21 percent of potash. The broker added that Belarus is responsible for an additional 18 percent of the global export of fertilizer potash.
It is not difficult to understand how global shortages in these important areas affect grain and animal feed production, but it will also have a much broader impact. For example, brokers point out that rag trade is being adversely affected by a 130% rise in cotton prices, while cosmetics and household goods production becomes a more expensive issue due to the significant rise in soybean prices. I am. , Palm oil and coconut oil. Inflation-boosted supermarket dynamics aren’t happening, given the extent of price increases, Peelhunt said.
However, there are companies that are doing well due to the conditions.
War wasn’t the only rise in palm oil prices.As MP Evans (MPE) Executive Chair Peter Hadsley-Chaplin said in an analyst call last month that the Southeast Asian labor shortage associated with Covid-19 has already hit supply.
“Therefore, restrictions, blockade restrictions and quarantine measures made it very difficult for Malaysia’s palm oil industry, which is already suffering from the labor force, to operate efficiently and effectively,” he said. This meant that harvesting and other important work could not be done. “It’s a continuous problem,” he added.
“Rising palm oil prices reduce additional input and labor costs [for producers]”Peel Hunt analysts Charles Hall and Clyde Lewis said.
At the end of the supply chain, the impact is clear.
In a recent speech to shareholders Unilever (ULVR) CEO Alan Jope warned that the FMCG giant expects an additional cost of € 3.6 billion (£ 3 billion) due to increased inputs, including freight costs. That’s 54% of net income by 2021.
The question is how efficiently the group can pass on costs to consumers, especially if the popularity of generic brands has increased significantly. It’s doubled when inflation is decades high, but it’s always important to establish the right price points if you don’t want to curb or reroute demand.
Other sectors are also in a pinch. Not surprisingly, the challenges facing the brewing industry have created many column inches in the UK. Beer producers, and thus licensed trade, were already struggling due to the nature of their energy-intensive business and the protracted sequelae of the Covid-19 blockade, but are now facing rising barley prices. increase.
FAO estimates that the price of barley, the main ingredient in beer, has risen by 27.1% since the invasion of Russia, but it is worth pointing out that grains make up a surprisingly small percentage of the cost of a pint. ..
In any case, European brewers are not particularly dependent on the Black Sea region for barley requirements. Most of the regional exports are directed to countries with strong beer culture, such as China and the MENA region.
However, if prices are favorable for crop rotation, and if farmers in the UK and Western Europe decide to replace barley with other grains, it is likely that barley prices will continue to rise significantly until next year. Traditionally, spring barley sown in early spring is preferred over winter barley, but that can change if brewers anticipate increased grain substitution next spring.
Packaging is a major cost factor for brewers, distillers, and, in fact, those who market to licensed trade. A March report released by Rabobank points out that energy, transportation and labor-related inputs will continue to increase over the next 12 months, which applies to the entire spectrum.
Rising prices for vegetable starch, a key component of the packaging process, could lead to a shortage in 2023, which could negatively impact all consumer prices and the net profitability of various sectors. There is already growing concern.