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Grain Prices Ease, But Fertilizer Short

FILE: A combine harvests wheat in a field near the village of Zghurivka, amid Russia's attack on Ukraine, in Kyiv region, Ukraine. Taken 8.9.2022
FILE: A combine harvests wheat in a field near the village of Zghurivka, amid Russia's attack on Ukraine, in Kyiv region, Ukraine. Taken 8.9.2022

Grain prices have dropped sharply from the record highs they reached following Russia's invasion of Ukraine, but another menace to global food security remains: a shortage of fertilizer.

Wheat prices reached a peak of nearly 440 euros ($440) a ton on the European market in mid-May, double the level of one year ago, as crucial Ukrainian shipments were stuck at port due to a Russian naval blockade in the Black Sea.

But prices have fallen to around 300 euros in August.

"The situation began to calm down at the end of May, beginning of June with the first reassuring harvest forecasts for Europe and the resumption of Ukrainian exports, first by road and rail, then by sea," said Gautier Le Molgat, analyst at consultancy Agritel.

Kyiv and Moscow reached an agreement in July, brokered by the United Nations and Turkey, that allowed Ukraine to resume grain shipments in the Black Sea.

The agreement opened a shipping corridor for 20 million tons of maize, wheat and sunflower seed oil stocked in Ukraine. According to the Joint Coordination Centre which manages the sea corridor, more than 720,000 tons have already left Ukraine.

"Thanks to intensive international cooperation, Ukraine is on track to export as much as four million metric tons of agricultural products in August," a senior US State Department official told AFP on Tuesday.

In addition to more supplies reaching markets and helping lower prices, the deal has led to a drop in insurance premiums, reducing transport costs.

However, while Ukraine's grain is moving again, Russian wheat exports in July and August are running 27 percent lower than last year, according to estimates by the Russian market research firm SovEcon.

That is due to fierce competition on the international grain market, as well as the strong value of the ruble and a high Russian export tax.

"As a result, farmers remain reluctant sellers," said Andrei Sizov, SovEcon's managing director.

The low volume of Russian exports is one of the main reasons why wheat prices have remained so high, said Sizov.

One of the reasons prices have not come down further is the surge in energy prices, due to the post-pandemic recovery and the war.

Higher oil prices impact transportation costs, while natural gas is a feedstock for manufacturing the chemical fertilizers that most farmers now use.

"Fertilizer prices have tripled in the last 18 months and the hard part of my job is forecasting what they will do in the next 18 months," Joel Jackson, a fertilizer analyst at BMO Capital Markets, said at an analyst conference in July in the United States.

With European gas prices soaring above 300 euros per megawatt hour, compared to an average of 20 euros over the past decades, "we've got a big problem as it's untenable for ammonia manufacturers," said Nicolas Broutin, head of the French subsidiary of Yara, the Norwegian firm which is Europe's largest fertilizer producer.

Yara announced Thursday it was reducing once again its production in Europe of ammonia, which is made using hydrogen obtained from natural gas and which provides the nitrogen in synthetic fertilizers.

CyclOpe, a French-based commodities research firm, said "it's in 2023-2024 that the rise in fertiliser prices and eventually their reduced use will be felt."

Farmers will try to pass on higher fertiliser costs to consumers, driving up food costs.

Meanwhile, reduced fertiliser use will result in lower crop yields and harvests, which will also drive up food prices.

CyclOpe expects in particular "considerably reduced" output in Africa, where farmers and consumers are both more sensitive to prices.