What are the threats to food security?

Energodigest | 23 June 2022

Just as ten years ago, the world is now threatened by a major food crisis, with the food price index rising 25% y-o-y in May to an almost record high (see Fig. 1). This rise came on the back of mounting geopolitical tensions, which disrupted supplies of energy and other essential inputs for farmers. As we mentioned before, the severe energy crisis has had a ripple effect in all sectors of the global economy.

Fossil fuels play a central role in the production of mineral fertilizers, which are used to increase crop yield and improve soil fertility. These fossil fuels are mainly natural gas and coal, with the latter being a key input for ammonia production in China. Natural gas makes up 70%-80%[1] of total costs for producing ammonia, a primary feedstock for nitrogen fertilizers, which account for 56% of global mineral fertilizer demand.[2] Nitrogen production is a rather energy-intensive process; it consumes four times more energy than oil refining. It’s no wonder that fertilizers are becoming more expensive as gas prices continue to climb (+ 235% y-o-y in Europe and +182% y-o-y in the US). Urea, for example, the most concentrated nitrogen fertilizer, traded at $710 per tonne this May,[3] more than double its price last year (see Fig. 2), while in the previous month it hit the highest level since the World Bank began keeping records in 1960.

Rising prices, however, are not as much of a problem as the looming shortage of fertilizers. Russia, for example, a leading player on the world’s fertilizer market (see Fig. 3) which has a competitive edge owing to domestic price controls on natural gas, has extended export restrictions on nitrogen and NPK fertilizers, which were introduced in late 2021, until December 2022[4] in order to secure domestic supplies. Following in Russia’s footsteps, China, the second-largest exporter, also imposed export limits last year, which are set to be lifted this June, but may well be extended through mid-2023, according to Bank of America.[5] Adding to the shortage issue, the EU has imposed a ban on imports of NPK fertilizers from Belarus.

The current situation poses a major threat to global energy security, as it may affect the upcoming harvest season worldwide, especially in importing countries (see Fig. 4). This is likely to give a boost to renewable-based “green” ammonia as a commercially viable undertaking, considering that natural gas prices remain high: costs to produce ammonia from natural gas are approaching $800 per tonne in most countries where gas is traded above $700 per thousand cubic meters, thus making nitrogen fertilizers uneconomical to produce.[6]

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