Strong market fundamentals are not the sole reason for the recent surge in grain and other agricultural commodities. Sky-high prices for fertilisers are also behind the recent rise.
Arable land requires the proper nutrients to ensure maximum productivity and yield. Fertiliser plays a key role in replacing nutrients that crops remove from the soil. Without the addition of fertilisers, agricultural productivity and output would be significantly affected. Various studies have quantified the impact of fertilisers on crops yields. Hence, fertilisers are essential to address food shortages and famine linked to population growth and mismanagement. It has become increasingly obvious as to why their consumption has drastically increased over the years.
Russia remains the largest exporter of fertiliser in the world, and in response to Western sanctions (following Russia’s invasion of Ukraine), Russia has suspended exports sending the price of fertiliser to record levels. To make matters worse, China, the 2nd largest exporter, announced last year that it would heavily curb fertiliser exports to ensure domestic supplies. Other factors driving prices higher include U.S. sanctions on Belarus, the 3rd largest exporter of potash, a key input in fertilisers, and soaring natural gas prices, from which urea is derived, another key ingredient in fertilisers.
With the current harvesting season well underway these effects should be limited, however, if these price pressures persist, we can expect such measures to have a drastic impact on next season’s yields. Although the sudden jump in fertiliser prices may be benign on this season’s harvest it will undoubtedly put upward pressure on inflation. As farmers are faced with two options moving forward: reduce their yields or raise their prices. In either case, this may lead to stickier inflation.