…global gas price spikes have forced fertilizer manufacturers to shut down
…inevitable effect on food prices impending
Agriculturalists are warning that food prices are likely to soar next year as farmers face the prospect of conducting the next crop season – which is just about starting now – without sufficient fertilizer. Record-high gas prices have forced fertilizer manufacturers to halt production and farmers now face the prospect of paying extraordinarily high prices for fertilizer and indeed may struggle to secure any supplies at all. This means choosing the option of paying inordinately high prices for fertilizer and passing the cost onto consumers or doing without fertilizers and suffering weak crop yields, which ultimately would also lead to surging food prices as supply of crops falls fall short of demand.
The latest major fertilizer producer, to cut production is Yara – one of the biggest suppliers of fertilizer to the Ghanaian market – which has announced that it is curtailing production because “record-high natural gas prices in Europe are impacting ammonia production margins”.
The Norwegian group said that 40 per cent of its European ammonia production capacity would be curtailed by this week. Last week night CF Industries, the American group, had said it was halting production at two sites in the north of England that together supply about 40 per cent of UK fertiliser needs.
Natural gas is the feedstock used to make ammonia, which is in turn used to make a variety of nitrogen fertilisers including ammonium nitrate, urea-ammonium nitrate (UAN) and urea.
Gas prices have surged globally this year as demand rebounds from the pandemic and after a long, cold winter that has left storage stocks unusually low. Demand has been particularly high in Europe because of low wind speeds that have hurt wind power generation and increased reliance on burning gas for electricity.
UK month-ahead gas prices hit record highs last week after a fire damaged a subsea power link to France, leaving Britain even more dependent on gas-fired power stations.
High prices and shortages of fertiliser now would hamper farmers’ ability to apply fertiliser early next year, affecting consumers at harvests around the world in 2022, Ghana inclusive.
Already the Government of Ghana’s fiscal challenges have forced it to cut back on fertilizer subsidies which have been a major pillar of its strategies to increase production of both cash crops and food crops. Ghanaian farmers are very price-sensitive with regards to fertilizer purchases because of low incomes and lack of access to credit which is inordinately expensive even where available.
In recent years, Ghana has had to cut back on the subsidies given cocoa farmers for their fertilizer purchases, in part because of government’s fiscal constraints and in part because a significant proportion of the subsidized fertilizer actually finds its way into local markets at close to the full commercial price. COCOBOD’s medium term strategy is to assist farmers in tripling their productivity – from 450 kg per hectare to 1,500 kg per hectare – through an array of support services, thus enabling farmers to but fertilizer and other key inputs at commercial prices and still come away with bigger profitability than ever before.
However sharply increased fertilizer costs would force government to bring back large subsidies which it can hardly afford or risk farmers reducing the fertilizer they apply on their farms. The latter option would be disastrous for COCOBOD’s increased productivity strategy.
Indeed the timing of this new fertilizer availability and pricing problem could not have been worse. Government’s planting for food and jobs initiative has been hugely successful with regards to production levels for both food and cash crops over the past few years, but the initiative is heavily dependent on the provision of subsidized fertilizer as well. The unfolding situation regarding fertilizer could seriously constrain the production gains Ghana has been enjoying since the initiative was introduced.
The situation is increasing calls for Ghana to establish a fertilizer manufacturing company immediately, leveraging on its ongoing huge natural gas discoveries. Such a manufacturing plant has been on the cards since natural gas was discovered at the Jubilee and TEN oilfields, but despite even larger deposits discovered at ENI’s Gye Nyame gas field – the country’s first non-associated gas deposits – plans have not yet moved beyond the drawing board.
Ironically though the current situation – if it persists – could be the catalyst for action from both government and private investors who it wants to partner to set up a fertilizer manufacturing plant.
In Europe there are growing fears that continued high gas prices may lead to a point where fertiliser producers “completely switch off and have nothing to offer”. Ghana has lots of effectively partly state-owned gas and could conceivably negotiate “cheap gas for cheap fertilizer” deals with fertilizer manufacturers.
The production shutdowns last week have caused chaos in the market. Chris Yearsley, director of Profercy, a fertiliser market analyst and news service, said: “There has been an immediate, panicked reaction in the nitrogen market with buyers across Europe scrambling for product. Uncertain of replacement costs and availability, many nitrate and UAN suppliers have pulled offers from the market”.
“The only certainty is that major volumes of fertilizer will no longer be available because of the shutdowns and cutbacks.”
The UK plants shut down by CF Industries last week primarily produced ammonium nitrate. Although some is imported, ammonium nitrate is difficult to transport because it is highly explosive.
Yearsley added: “Though far from ideal, it is possible for farmers to switch between nitrogen products. However, the problem is that prices for all products have sky-rocketed.” Urea prices have doubled over the past year, he said.
The most important question now is: how long will this situation last? This is new terrain for global markets, since such a sharp debilitating price hike has never occurred before.
Ghana’s gas industry economists will now have to go to work. Locally sourced natural gas has been seen as the immediate solution for Ghana’s power generation problems, and so the country uses its gas as feedstock for power plants rather than to generate foreign exchange through export sales. A long term spike in gas prices may persuade Ghana to reconsider this strategy as a whole.
But in the meantime the immediate issue is how to ensure that Ghana’s farmers get fertilizer and at affordable prices for the 2021/22 crop season which is just commencing.