Russian-Ukraine Conflict: Impact on Fertiliser Supply & Food Production

by Emma J Devereux

Citation: Devereux, E.J.,(2022), “Russian-Ukraine Conflict: Impact on Fertiliser Supply & Food Production”, EcoFoodDev, https://www.ecofooddev.com/russian-ukraine-conflict-impact-on-fertiliser-supply-food-production/

Fertiliser inputs are essential to modern farming and the mass production of food. Whether applied for the production of food grown for direct consumption such as wheat, barley, and oats, or for fodder grown for livestock. While much research is taking place into alternative forms of fertiliser and nature-based solutions to reduce fertiliser inputs in agriculture, as it currently stands, global food security depends on the availability of fertilisers, especially potassium, nitrates, phosphorus, and potash. Potash is a potassium-rich salt fertiliser that enhances plant quality and is responsible for 20 percent of global fertiliser demand. Therefore, global fertiliser supplies are sensitive to geopolitical volatility.  As we are at the beginning of the food supply chain here in spring, the indirect effects of the Russian-Ukrainian conflict on fertiliser will begin to make themselves known throughout the coming months.

The Russian invasion of Ukraine has already had an effect on fertiliser prices, and potentially poses greater risks in the near future. The scale of that impact will depend on several factors, such as the sanctions imposed on Russia, whether those sanctions include the agrochemical industry, and oil and gas price volatility and the knock-on effect on transport/production costs. High gas prices will severely impact the production of fertilisers and keep currently offline production plants offline – or drive some offline, if the cost of producing fertiliser isn’t economical. Liquefied Natural Gas (LNG) is more expensive than that used by Russia in their fertiliser production. These knock-on effects are already being felt on food prices, pushing up the commodities markets to a record multi-year high.

Russia plays a vital role in the agricultural fertiliser industry, producing phosphorus, nitrogen and potash, and exports roughly 50% of its ammonium-nitrate fertiliser, primarily to Europe. Russia accounts for 24% of global ammonia exports (c.4.5Mt in 2020; 2.3% of global ammonia production). Hence, Europe is sensitive to fertiliser shortages originating from Russia, and price volatility related to Russian foreign action. Russia banned ammonium-nitrate exports since the beginning of February (to secure domestic supply), and this was due to be eased on April 1^st, after which a reduction in prices was hoped for. This is now looking increasingly unlikely, and the gas price hikes in response to cancellation of projects such as Nord Stream 2 will produce the opposite effect.

Ireland imports roughly 22% of its fertilisers from Russia. Sanctions, import/export bans and increasing gas prices will increase the cost of fertilisers for Irish farmers. These increased costs, and hence reduced fertiliser inputs, will impact 2022 crop yield. Farmers are being urged to consider their fertiliser usage and consult their advisors, with many looking to lime to increase soil pH for better returns.

2022 Fertiliser Price Predictions

Analysts already predict that conflict in the Black Sea Region poses a threat to cheaper fertiliser prices for 2022. Oil and gas price volatility since January saw fertiliser prices dramatically rise. The agriculture industry has already been dealing with covid-related supply challenges, and tariffs and trading disputes which increased farming costs throughout 2021. While the Ukrainian conflict might not have made a direct input on fertiliser prices yet, farming is a seasonal market with fertiliser buying primarily taking place later in the year– and these impacts will be felt then. All this occurs at a time when there are calls to reduce the cost of fertiliser. In Ireland, the peak grass growing season is upon us, and most farmers had hoped that fertiliser prices might see a decline. Nitrogen prices had been declining, but a continued decline would depend on a reduction in market disruption and increased nutrient supply in the coming year. For example, urea FOB NOLA (New Orleans, Louisiana) finished 2021 at $765 per short ton, but was $578 per short ton last week (Quinn, 2022). However, the global fertiliser market is significantly reacting to the Russian invasion of Ukraine. Urea has increased by $200 per ton, and NOLA US prices have increased by up to $200 per ton in an extremely short space of time. Urea prices jumped ~33% in less than 12 hours. The market is currently reacting to fear, as supply and demand issues are not yet a factor, but as mentioned- they will be.

Nitrogen prices have risen with gas prices. Farmers have waited to buy fertiliser, and now there is concern regarding reduced food production in 2022, especially if the second application window in May/June cannot be met. This will be especially worrying if weather conditions are suboptimal, and if there is a greatly reduced export market/higher import prices for grain.

Example of impact of sanctions on fertiliser supplies: Belorussian potash

Russia is already being hit with sanctions from major international actors. These sanctions are levelled at various industries. We can look to Belarus for an example of the impact of sanctions on fertilisers.

Belarus is a major producer of potash, producing roughly 12 million metric tons of potash in 2019, supplying ~18% of the world’s potash. In June 2021, the EU imposed sanctions on Belarus due to a border dispute, and the US followed in December 2021. These sanctions included the potash industry. As of now, Lithuania has cancelled the contract with a Belarusian potash producer for transport via a particular Lithuanian port, meaning that potash cannot be easily transported out of Belarus. This port handled roughly 92% of Belarusian potash exports in 2020, and so although Belarus will still be able to export, their potash exports will be greatly reduced. Of course, there are other global producers of potash who can fill the gap. Russian and Belarusian sanctions that impact potash could be addressed by Canada, who are also a significant potash producer, but, demand is high, prices are high, and transport prices are increasing, which means the gap will not be so easily filled. This shows how sanctions can impact global fertiliser supply (Good, 2022).

Logistics

As a result of the invasion of Ukraine, there is currently a ban on all commercial ships on the Sea of Azov. The Sea of Azov is logistically integral as it is an inland sea that connects to the Black Sea and its ports. Ukrainian ports are currently closed. Wheat exports from Ukraine are primarily (over 90%) by sea, and so these actions already will have huge impacts on Ukrainian wheat exports and exports of other food supplies. As mentioned in a previous post, Ukraine produces corn for livestock, and exports corn to China for the largest pig herd in the world. Ukraine, in fact, supplies one third of the Chinese corn imports. The closure of these ports will hit corn and wheat exports, and other agricultural products such as sunflower oil. Railways are also closed for commercial activity, yet another arterial blow to the agriculture and food sector.

Wheat prices have risen to a 10 year high in response to the conflict, and corn prices have increased by 15% (Good, 2022). Poor harvests in countries like Canada (which supplies much of the milling wheat to Europe and Britain, alongside Germany) will mean that food supply chains will be hit hard by this disruption to the Ukrainian wheat supply and the resulting rising prices. Russia has, however, already exported two-thirds of the season’s wheat and barley. Global prices would be driven up if that final third was not exported to foreign markets.

Sanctions

As of yet, limits on agricultural trade have not been directly placed on Russia. Instead, sanctions have focused on advanced technology, such as aircraft technology. China will be the ones to watch with regards to grain, to see whether they import from the global market or import solely from Russia.

Competition-ish

In February, EuroChem group (whose management and ownership are based in Russia) made a binding offer to buy the chemical assets and nitrogen fertiliser of Borealis, an Austrian oil and petrochemicals company. As a result, EuroChem is the second-largest fertiliser company in Europe after Yara, of Norway. However, companies such as Yara depend on Russian gas for fertiliser production, and their production has recently been curtailed due to high gas prices. Competition proceedings could be brought against EuroChem to stop them from taking over Borealis, but this is still under debate. Organic fertilisers would not fill the gap given the reduced output compared to input (not at the moment in any case) (Dizard, 2022).

Cover image: Potash mine, Russia. https://www.artsy.net/artwork/edward-burtynsky-uralkali-potash-mine-number-8-berezniki-russia

References

Dizard, J., 2022, “Fertiliser and food: the next point of tension between EU and Moscow”, The Financial Times, https://www.ft.com/content/a4439155-197b-4e63-baee-b4fa3229ac67 26.02.2022

Good, K., 2022, “Russia Invades Ukraine: Supply Disruption Concerns Fuel Wheat, Fertilizer Prices”, Farming Policy News, https://farmpolicynews.illinois.edu/2022/02/russia-invades-ukraine-supply-disruption-concerns-fuel-wheat-fertilizer-prices/ 27.02.2022

Quinn, R, 2022, “More Fertilizer Volatility?”, Progressive Farmer, https://www.dtnpf.com/agriculture/web/ag/crops/article/2022/01/27/russia-ukraine-conflict-cause-supply 27.02.2022

Ostendorf, M., 2022, “Potential impacts of the Russian invasion on the fertilizer industry”, Successful Farming, https://www.agriculture.com/news/business/potential-impacts-of-the-russian-invasion-on-the-fertilizer-industry 27.02.2022

Irish Farmers Association, 2022, “Impact of the Russia/Ukraine Conflict”, https://www.ifa.ie/campaigns/impact-of-the-russia-ukraine-conflict/ 27.02.2022

Julien, G., 2022, “From Russia, With Monopolies”, Washington Monthly, https://washingtonmonthly.com/2022/02/25/from-russia-with-monopolies/  27.02.2022