Author: Mārtiņš Geidels, head of the LANDE.LV credit department
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Spring is here – the time for summer sowing and fertilizing the soil. There is no shortage of challenges. Agricultural commodities are setting unprecedented price records, largely driven by global developments that will be at least partially transitory.
One of the most important factors for the increase in the prices of agricultural raw materials – mineral fertilizers, fuel – is the change in the energy market. Oil prices increased significantly at the beginning of this year, but at the beginning of March 2022 they reached 120 US dollars per barrel. In general, the value of the S&P GSCI index of various raw materials rose at the beginning of March to the highest level since 2008, or just before the global financial crisis, when the price of oil approached 150 US dollars per barrel.
Fuel prices at gas stations in Latvia are currently approaching 2 euros per liter and uncertainty about the future is huge, which leads to various speculations. It should be expected that with Russia’s invasion of Ukraine, the prices of energy resources will be high, both as Western countries try to reduce their dependence on Russian resources, and by introducing sanctions against Russia in order to stop its ability to finance the war in Ukraine, and by Russia itself using the supply of energy resources as a geopolitical weapon. Although the increase in energy prices will decrease over time, uncertainty will be very high in the near term and therefore energy prices will remain high, with possible rapid price fluctuations.
In order to understand the overall impact, it is worth looking at the CSB energy resources statistics for 2021. On average, 119 thousand are consumed in Latvia every month. tons of oil products, 1059 thousand MWh of natural gas, 615 million KWh of electricity. In 2021, Latvia directly or indirectly imported the majority of natural gas, part of electricity, coal and a significant part of oil products from Russia. Latvia’s most direct dependence is on natural gas from Russia, where Russia is the most important supplier and in 2021 it was paid 389.4 million euros, or 90% of the total natural gas procurement in Latvia. With the hostilities in Ukraine, it is clear that these resources will have to be purchased elsewhere and, most likely, more expensively, for a certain or indefinite period of time, which will significantly affect the overall economy.
The price of natural gas, which is both a source of energy and a direct raw material in the production of urea, ammonium nitrate and other mineral fertilizers with a high nitrogen content, has a great influence on the formation of the price of mineral fertilizers. The rapid increase in the price of gas also caused the price of all products of the nitrogen group to rise faster than usual. Producers began to slow production due to too fast and unpredictable prices, which in turn led to a shortage of production in the market and further upward pressure on prices.
The first trends in the price increase of mineral fertilizers could be observed at the beginning of 2021. This caused extensive discussions – whether to wait and hope for price stabilization, or to buy fertilizer in time. In the first half of 2021, everyone complained about the impact of the COVID-19 pandemic on prices, then some farmers were waiting for autumn, but no one knew that the energy crisis would occur, which increased the prices of natural gas, which is the main raw material for fertilizer production, more than 4 times during the year. The doubling of emission allowance prices also had its impact.
In the world market, the price changes of mineral fertilizers are impressive (see graph), the prices have increased by 1.4-2.2 times during the year (as of February 2022), which of course also affects the price of mineral fertilizers in Latvia. The largest producers of mineral fertilizers and mineral fertilizer raw materials in the world are Russia, China and Belarus, therefore the market of mineral fertilizers is under great political pressure.
Along with political sanctions against Russia and Belarus, as well as China’s decision to limit the export of fertilizers until June 2022, there is a production deficit in world markets and this requires a market reorganization. Currently, new market participants from India are planning to enter the mineral fertilizer market, which could alleviate the crisis in the mineral fertilizer market. However, it is not known whether this will be enough to ensure the global supply of mineral fertilizers. The situation in world markets is tense and the consequences will be felt for a long time.
The tight situation in the fertilizer market makes some farmers think about reducing fertilization or looking for alternative products. 2008-2009 should be mentioned here. the situation in 2010, when the prices of fertilizers increased significantly, some farmers decided to reduce fertilization rates, while others did not even fertilize their crops, as a result of which 1 ton less crop was produced in 2010, which was followed by an increase in food prices. Therefore, everyone should make a decision about soil fertilization.
It is predicted that more and more farmers will look for alternatives – replacing chemical fertilizers with biological and organic materials, which have been in little demand until now. In Latvia, there is sapropel, peat, ash, digestate obtained in biogas stations, which can be used as the basic raw material of natural mineral fertilizers, but their production should still be developed. The European Union strategy “from field to table” also envisages a 20% reduction in the use of fertilizers, another strategy envisages a 50% reduction in the use of plant protection products, all of which will contribute to a greener future.
In general, the year 2021 was completely unpredictable – fertilizers became more expensive, grain prices remained high and the harvest was not as big as planned. Currently, the prices of mineral fertilizers continue to set new records, their availability is limited and future forecasts are uncertain. It is to be hoped that the right decisions will be made globally, so that agriculture can stabilize as soon as possible and the cost-to-income ratio will get the desired ratio. However, recent challenges confirm that one should expect the best but prepare for the worst. May the best possible scenario come true!
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