Impact of high natural gas prices:

• High natural gas prices, if sustained through early 2022, will translate into higher food costs and reinforce an inflationary trend in this sector that is already being driven by supply chain disruptions, labor shortages and increased demand from the biofuels sector.
• We have already seen cutbacks in fertilizer production in Europe which is creating a tight situation for CO2 production, a by-product of fertilizer production. This will impact aspects of the food supply chain that need CO2 in meat, frozen vegetable and beverage production.
• High natural gas prices have already filtered into the fertilizer market with nitrogen fertilizer prices at historically high prices relative to nitrogen dependent crops such as corn and in the EU wheat.
• The task of the agricultural markets from here will be to keep prices high enough to the farmer for nitrogen intensive crops such as corn to maintain economics that are favorable to corn production relative to other crops.
• But, the good news is that at least from a Northern Hemisphere perspective farmers will not need to make a planting decision until the March-April 2022 time-frame and crops including corn will be available from the Southern Hemisphere beginning in May. So there is time for the natural gas market to adjust. But, it does mean that if natural gas prices are sustained at current levels or go higher, agricultural prices and especially corn will need to stay high to maintain needed acres and again, this will feed into higher food prices.

Influence of the Ammonia market

• European ammonia prices are currently close to $700/t, which is getting to the upper end of any acceptable range. Only once have they got almost to $1000/t (Q4 2008 with the financial crash). So whilst we don't know exactly where the ceiling will be, we can confidently say that the closer the price edges to $1000/t the more demand destruction there will be.
• As CF Industries has, at current gas prices, shut both its ammonia production and its downstream nitrates / NPK production in the UK, by definition at current gas prices demand destruction is happening for fertilizers in Europe, as CF's clear conclusion has been that if they produced fertilizer based on $22/MMBtu gas they would not be able to sell it profitably - i.e. the market won't take it.
• Some fertilizer producers might opt to buy ammonia from lower-cost regions and continue to produce. That suggests (in the European context) that the fertilizer market will stand European gas prices of around $18/MMBtu (= $680 ammonia - current import price). So the tipping point in terms of ammonia prices is a little north of $680/t but not much further - for which there is clear evidence.
• In Europe (as with North America) we're approaching / in the autumn application season for crops such as winter wheat. Some of this will already be committed. At current fertilizer prices (bear in mind both phosphates and potash are also extremely high at present) we are confident that farmers will reduce autumn application volumes. If prices reduce then they could take larger spring volumes and compensate then. However if prices do not reduce, we would expect it to translate into a yield reduction for the winter-sown crops, and clearly if it extends into the spring for those crops as well.
• Lower yields should translate into better crop futures prices, which in turn would buttress fertilizer prices through next year.
• History suggests quite firmly that farmers are not prepared to buy 'normal' volumes at current price levels for fertilizers. The last time potash prices were at current levels for a sustained period (2009) global annual demand almost halved. When the ammonia price hit the high $900s in 2008 there was, quite literally, no market for 6 weeks and when it did open up prices had come down significantly. This unfortunately means that any expectation that downstream food prices might enable fertilizer demand to remain strong is unlikely. The risks from doubling or trebling Farmers' fertilizer costs are too severe - the crop can still fail because of issues like the weather.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.