If water is the source of life, fertilizer is the source of scaleable food production.
The increasing cost of fertilizer is one of the largest contributors to a “cost-price” squeeze affecting the farmers of major agricultural products in Australia and globally.
The cost of food is increasing in step with the cost of producing that food, and in the past quarter in Australia, we have seen food inflation increase by 2.8% – the fourth-highest quarter since the turn of the century.
The price of wheat, the main staple for much of the world’s population, has increased 61% year-on-year. But while the outputs are growing, so too are the inputs. Incomes will be strongly improved in 2022, but margins may not substantially increase.
In many other parts of the world, there are concerns about the transparency of fertilizer pricing. Australia has no openly published fertilizer pricing. Analysts get around this by producing a modeled price to show Australia’s fair value/replacement value. This indicates that fertilizer cost has risen 107% during the past year, not including importer margins.
Over the next year, farmers will examine their cost structures and decide how much fertilizer to apply. If they opt to use less, we will see the potential yields of major crops decrease.
This could be a big concern for the global food supply chain.
Fertiliser and the price of gas
Until the start of the last century, fertilizer consisted of composted manure from livestock or harvested guano (bat feces).
The Haber-Bosch process, a method of directly synthesizing ammonia from hydrogen and nitrogen, changed everything. But the creation of synthetic fertilizers requires a large amount of energy produced using natural gas or coal. Globally, the Haber-Bosch process uses about 3% to 5% of the world’s natural gas production, which adds to costs as gas prices rise.
Australia produces about half of the fertilizer it needs. There are plans for several new fertilizer production facilities in Australia, including a urea fertilizer project in Western Australia, which has received $255m in government loans.
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This urea project will, if completed, be capable of supplying nearly all domestic requirements. In reality, fertilizer use is seasonal and will also be exported.
The rising cost of a commodity generally results in demand destruction. In this case, farmers use lower volumes of fertilizer. The reduced use of fertilizers is a concern for China, which is worried about food security.
In September last year, China wanted to ensure that local farmers used appropriate fertilizer applications to maintain strong crop yields. Export controls on fertilizers were introduced to keep fertilizer products available to the Chinese domestic market.
This event had a flow-on effect globally: with China as a major exporter, the global supply of available fertilizer was drastically reduced, leading to an increase in price.
The lack of Chinese fertilizer was one of the most significant drivers of fertilizer pricing in the second half of 2021, but it wasn’t the only geopolitical factor.
After showing some downward trends in December-January when gas started to fall, the Russian invasion of Ukraine caused the gas market to rise again. Combined with restricted exports from the Black Sea, this caused a further increase in fertilizer prices.
The advent of synthetic fertilizers allowed the world to produce much larger yields of crops from the same amount of land; without it, the world would not be able to support a population of 8 billion.
Life without fertilizer
Let’s look at what happens when barriers are placed for synthetic fertilizer use. Sri Lanka is an example of the fallibility of organic farming on a large scale and the folly of government interventions in food and agricultural markets.
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The Sri Lankan government decided in 2021 to force the entire island nation into organic farming by banning synthetic fertilizers and pesticides. The reasoning behind this was twofold: firstly, a belief that a ban would reduce healthcare costs, and, secondly, to minimize foreign currency outflows.
The ban resulted in drastically reduced yields for the country’s major crops of rice and tea, meaning Sri Lanka now requires much larger food imports.
Intervention in fertilizer use was a monumentally flawed policy, and many scientists and analysts raised concerns about the implications. First and foremost, it has locally exacerbated the food price inflation that the world is already suffering through. Secondly, it has caused a massive economic shock to the nation, causing protests and an inability to pay foreign debt.
Australia produces an abundant surplus as a country producing vast quantities of food and a relatively small population. In recent years, Australia has grown more than 1 tonne of wheat for every person on average.
In Australia, consumer expenditure on food is roughly 10% a person compared with many developing countries, where consumer spending on food can reach as high as 59%.
Reductions in luxuries can offset a rise in food prices in Australia; in other places, it’s offset by eating less. The effect will be felt in the poorer parts of the world, not the richest.
The world needs synthetic fertilizers to produce the required calories. There are no other solutions that are yet capable of substituting it.