Everyone has already managed to hear and feel the first impact of the price of gas and the rise in the price of mineral fertilizers. Many have taken a wait-and-see attitude, hoping that somehow it will resolve itself by the new year, and someone has panicked and demands that the government support the farmers, because “we will all starve to death.” Of course, there are enough smart people who analyze and calculate the situation and draw up work strategies for the next year. This material contains studies of the situation and analysis of all factors of influence and future risks.
The Four Horsemen of the energy collapse: China, coronavirus, climate and Russia
These are the main reasons for the rise in prices for gas, coal, oil and other energy carriers. First, this is the ill-considered policy of China, which quarreled with the main coal supplier Australia and decided to come out with a good face at a bad game – it began an accelerated reform of its own economy to reduce the impact on the climate. By order of the power plants, quotas for CO2 emissions were introduced, which were supposed to force the power plants to switch from coal generation to gas generation. But the measures turned out to be so harsh and thoughtless that there was a sharp shortage of gas and electricity throughout the region.
It even came to “rolling blackouts” of electricity in the capital and other cities. Many factories switched to a four-day working week, reduced shifts, or closed altogether. Even the Chinese factories of Apple, Tesla and other techno giants have had problems.
Now China is “eating out” all available gas reserves on the market. Competition for energy carriers forces other importers, such as Japan or Malaysia, to raise the price, which makes the Asian market extremely profitable for suppliers. All gas exporters consider supplies to Asia a priority, so there is a shortage in Europe.
The “old World” is also recovering from the pandemic at this time. Vaccinated employees are returning to normal operation at factories, economies are reviving and require more gas than was needed until now.
The third factor is climate change, which increases interest in gas not only in China. For example, in the United States, the consumption of fossil fuels has been reduced by a total of 9% compared to previous years, but this is due to oil and coal, but gas consumption has increased sharply and already accounts for 36% of all energy generation in the States.
In addition, the Northern Hemisphere was covered by a sharp cold snap in September, which increased the demand for gas, which is still not enough in Europe’s storage facilities.
And the fourth regional factor in Europe is Russia. Taking advantage of global trends and the need for a quick launch of the Nord Stream — 2, the Russians are systematically reducing gas sealing to the minimum possible, “stimulating” the certification process of the new gas pipeline. The motivation to act through “pinching fingers in the door” is well known to Russians historically, and they use it to the fullest.
The agricultural sector is out – which industries are most dependent on gas
The consequences of the rise in gas prices affect agricultural production on several tangents at once. Unfortunately, Ukraine will suffer more than many other countries, because our dependence on gas is critically high in the most important sectors of agriculture. And many related areas will suffer indirectly, because the energy crisis affects the economy in a complex way.
Here, the influence of the rise in gas prices is already felt today in the prices for drying grain, the cost of fertilizers. But over time, the impact of the crisis may spread and deepen, experts say, because the shutdown of plants, delayed demand for fertilizers and agricultural products due to high prices, revision of cultivation technologies by farmers, can significantly change the market situation in winter and spring.
Nitrogen fertilizers have already increased significantly in price this year, but the current price of UAH 21-25 thousand per ton of urea is far from the peak, experts predict. Firstly, it is not known where the gas price will stop. Until recently, the figure of $900 / thousand cubic meters was considered a peak, but now we have already seen the price of $1950 / thousand cubic meters. Given that in Ukraine the share of gas in the cost of fertilizers is up to 80%, it is quite possible to expect further growth.
Secondly, many are afraid of a shortage of fertilizers already in winter and spring. After all, due to the high cost of gas and other problems, some chemical plants simply stop working. This process is underway both in Europe and in Ukraine, where 2 plants for the production of mineral fertilizers have already stopped.
If fertilizers enter the market with a price tag of more than 30 thousand UAH /t, it is unlikely that every farmer will be able to afford to buy them. Realizing this, factories may deliberately not produce fertilizers, so as not to get a full warehouse and empty pockets.
In Europe, two chemical giants have already announced plans to reduce fertilizer production – the British concern CF Industries Holdings and the Norwegian Yara International, reports biz.liga.net with reference to the Financial Times.
In such a situation, there are fears that in the spring it will not be the price of fertilizers that is important, but their availability. How the strategies of farmers will change and what consequences they need to prepare for — read about this in another section below.
Plant protection products
Due to the already mentioned problems with energy in China, factories for the production of active substances and pesticides are also working intermittently. The chemical industry is one of the most energy-intensive, and it is it that will suffer from a gas shortage in the first place. For Ukrainian farmers, this may result not only in an increase in the price of agricultural products, but also in the absence of certain positions on the market in the spring, experts say.
Due to rolling power outages, some Chinese factories producing active substances have recently been operating one day a week. Some stopped altogether. Therefore, most of the contracts already concluded are now in question on their implementation from the Chinese side.
Gas drying of grain is one of the most common types in Ukrainian elevators. Alternative fuels such as wood chips, straw, etc. are used much less often, because the smoke from the burning of such energy carriers can cause discontent among the population, farmers are sure.
But the problem of this year is also that the cold, prolonged spring caused a delay in the timing of sowing corn and sunflower. Accordingly, the maturation period has also shifted to the deep autumn. Therefore, farmers are now forced to thresh grain with higher humidity than usual, and the cost of drying increases even more with each “removed” percentage.
Given such prices for drying and high humidity, some farmers will choose a strategy of waiting and harvesting corn after the humidity decreases, even if it is in winter on snow. Farmers in many regions have experience of such harvests.
In animal husbandry, there are also areas that depend on gas directly, and there are also those that are remotely affected by concomitant impacts. But here the situation will definitely be harder than in crop production. Firstly, the modernization of production and the transition to alternative energy will cost more here, secondly, the marginality of business is already extremely low, and both the low purchasing power of the population and the pressure of imported products does not allow raising prices.
Heating of chicken coops for the production of broilers and eggs in Ukraine is traditionally produced by gas. Also, these livestock areas consume a lot of electricity, which increases in price after gas. Therefore, the rise in price of the most popular types of meat is not just possible, but inevitable.
However, there are a few “buts” here. Some manufacturers have already started switching to biogas heating earlier, getting it from their own production waste. This will give them a competitive advantage and keep prices from rising to a certain limit.
In addition, chicken is the most budget meat in Ukraine and is included in the diet of less affluent strata. An increase in its value will simply kill demand. The population will simply start consuming less meat. And chicken producers will be faced with a choice: sell at a loss or reduce production.
With animal feed, too, not everything is smooth. There is no doubt that the increase in energy prices will raise the cost of corn, soybeans, sunflower and other crops that may need drying this fall. Further, processing of raw materials, production and drying of compound feeds is also increasing in price. After all, these processes are very energy-consuming.
First, the cost of production of oil extraction plants will increase: cake, meal, protein concentrates. Because of this, the protein group of feeds will rise in price significantly, and the cost of milk, eggs and meat production will increase according to it.
Almost all branches of agricultural processing are costly in gas consumption: the production of sugar, butter, meat products, dairy products, flour, and the like. In addition, these industries are significantly affected by consumer inflation, which is growing after gas prices, and accordingly the burden on the salary budget, the purchase of production resources, equipment, and the like is growing.
“Only an increase in gas prices will increase the cost of sugar production by more than 30% compared to last year. In a longer period of time, and this is the sowing season of 2022, we will see a significant increase in prices for mineral fertilizers, rolled metal, construction materials and others, which will eventually be the next inflationary round and will again fall on the cost of growing sugar beet and sugar production.”
The Federation of Employers, together with other national business associations, also appealed to the Government and Parliament with a proposal to provide funds in the state budget for state support of the sugar industry in order to reduce the negative impact on the industry from rising energy prices.
According to the federation, the provision of sugar beet processing and sugar production this year requires the purchase of at least 300 million m3 of natural gas by sugar factories.
Who was preparing — well done, or what will be the consequences in 2022
So far, most farmers say that the situation with fertilizers is painful, but not catastrophic. The high price of this season’s products allows you to purchase fertilizers for the next season. However, if the cost of nitrogen fertilizers grows even higher, then serious problems will arise. The weight of weather risks for the next season is also growing.
Let’s say in advance that the gap between powerful, rich farms and small, low-tech businesses will grow even more, because the opportunity to invest in more cost-effective solutions for production may prove decisive in the near future.
“Nothing-till” or reasonable savings?
The 2022 season will force many to reconsider their approach to business. Due to the increase in the costs of fertilizers, protective equipment, land lease and fuel, which repeats the dynamics of gas prices, farmers will be forced to save on technologies and seeds.
There are even radical statements by farmers about reducing acreage, abandoning mineral nutrition for the next year, spending only at the level necessary to obtain a minimum harvest that can cover the cost of rent and other items of expenditure. In social networks, this approach has already been dubbed the name “nothing-till”.
On the other hand, many also predict a transition to more saving technologies of tillage, nutrition, and the like. In an advantageous position will be those who have already managed to make the transition to precision farming, to introduce alternative energy generation from straw, wood chips, biogas. The role of nitrogen fertilizers for production remains high, so most farmers do not plan to abandon them, but they do save.
The weight of variety testing and demo polygons is growing more than ever — producers now have a chance to justify these investments by choosing less expensive and sufficiently productive varieties and hybrids for sowing. The strategy of “maximum quality at any price” will definitely not be in trend.
The issue of “technological breakthrough” also concerns processors. With such a gas price, only the deep modernization that they have carried out recently (since the “gas” crisis of 2008) saves the company from bankruptcy.
Exchange rate currency risks
It is also necessary to take into account the hryvnia exchange rate, which has moved to a serious strengthening due to the rise in gas prices. The fact is that enterprises that imported gas from abroad have reduced production and reduced the volume of gas purchases. As an example – the same. The Odessa port side plant import – export balance is undergoing serious changes, and we once again find ourselves in a situation where we buy raw materials for cultivation in the spring at a high dollar exchange rate, and sell products in the fall on its fall.
Thus, the profitability of farmers’ business decreases even more, and they are forced to put grain in storage in anticipation of rising prices and the dollar exchange rate. But we need money for production right now.
Distributors under the gun
Given the high cost of fertilizers that need to be applied already this year, the low marginality of production and the likely complications in the work of sugar factories, farmers can significantly reduce the area under sugar beet next year.
The seeds of this crop should be purchased by farmers in the coming months, so there is a risk that a significant part of the already ordered goods will be “dead” cargo in the distributors’ warehouses. This will further reduce their working capital.
Also, sales of premium brands of NWR and seeds, which brought the largest margin to sellers, may well decrease. The number of fakes and counterfeits that will compete with the official distributor will also increase.
In addition, the risk of farmers’ non-payments increases in case of negative weather events or price conjuncture, because agricultural producers simply do not have free working capital after the rise in price of basic resources. Therefore, the chances of seeing another drop in distribution companies in 2022 are higher than ever.