How the energy crisis is exacerbating the food crisis

Peter Levi Gergely Molnar Peter Levi, Energy Analyst - Industry
Gergely Molnar, Energy Analyst – Natural Gas Commentary —

Russia’s invasion of Ukraine has added to mounting pressure on global food supply chains

Food prices have increased steeply over the last two years and appear set to go higher following Russia’s invasion of Ukraine, putting millions of people at risk. While the current tensions in food supply chains are caused by a multitude of factors, the link with the global energy crisis should not be overlooked. The disruptions caused by Russia’s war in Ukraine have brought the intertwined nature of the world’s energy and food supply chains into sharp focus.

According to the World Food Programme, the number of people facing acute food insecurity more than tripled between 2017 and 2021, and could further increase by 17% to 323 million this year as a result of Russia’s war in Ukraine.

The surge in food prices since mid-2020 has been driven by factors such as the recovery in demand following the Covid-19 crisis, adverse weather impacts on supply, a growing number of trade restrictions on food products, and rapidly soaring input costs, notably energy and fertilisers.

Russia’s invasion of Ukraine has added to the mounting stress on food supply chains. The two countries are major food exporters (together accounting for almost 30% of global wheat exports) and play a key role in global fertiliser supply. Russia's blockade of the Black Sea ports has disrupted food and other commodity exports from Ukraine, while the broader military aggression is putting at risk this year’s harvest. The war is also driving up energy prices, which have spillover effects on food supply chains via rising energy bills and soaring fertiliser prices.

Globally interconnected supply chains and markets for food and associated inputs (agrochemicals, fertiliser, fuel, feed, capital and labour) mean that seemingly small supply disruptions in one region or sector can lead to dire consequences in another. 

Key food commodity prices, 2020-2022

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The unfolding food supply crisis highlights the interconnected nature of energy and food supply security

The agriculture and food industries use energy for various purposes. Direct energy use includes electricity for automated water irrigation, fuel consumption for farm machinery and energy required at various stages of food processing, packaging, transportation and distribution. The use of pesticides and mineral fertilisers results in large quantities of indirect energy consumption, with these inputs being highly energy intensive to manufacture. While the share varies considerably between regions – depending on factors such as weather conditions and crop types – direct and non-direct energy costs can account for 40% to 50% of total variable costs of cropping in advanced economies such as the United States. Higher energy and fertiliser prices therefore inevitably translate into higher production costs, and ultimately into higher food prices. 

Operating costs of selected crops by key cost item in the United States, 2022

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With their heavy reliance on energy, fertilisers have become much more costly

Nitrogen is an essential nutrient for virtually all plant life. Ammonia is the starting point for all mineral nitrogen fertilisers, and half of ammonia is converted to urea, the most common nitrogen fertiliser product used globally. Across the world, ammonia is made almost exclusively from natural gas, consuming around 170 billion cubic metres (4% of global gas consumption). The exception is China, where ammonia production is based mainly based on coal.

Fertiliser prices have more than tripled since mid-2020 to reach their highest level since the 2008-09 crisis and their highest level on record in the case of urea.

This surge in fertiliser prices has been partly driven by the recovery in demand, various supply disruptions and trade restrictions, and soaring input costs. The cost of producing fertilisers is closely linked to energy prices, particularly in the case of nitrogen fertilisers. Natural gas often accounts for 70% to 80% of the operating costs of producing ammonia and urea, resulting in close correlation of prices. In recent months, nitrogen fertiliser plants have announced temporary closures, citing spiralling natural gas costs as the cause.

Natural gas prices have risen strongly across all key gas-consuming regions since early 2021, with European and Asian benchmark prices hitting all-time records in the first quarter of this year following Russia’s invasion of Ukraine.

In addition to the strong increase in input costs, trade restrictions have pushed fertiliser prices higher.

Correlation between urea fertiliser and food price indices, 2016-2022

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Correlation between gas and urea fertiliser price indices, 2016-2022

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Scarce fertiliser supply will disproportionately impact import-dependent markets

The top five ammonia producers – China, the European Union, the United States, India and Russia – account for around two-thirds of global production. Russia has by far the highest share of production that is destined for exports, at around one-fifth. The EU, the United States and India are all significant net importers, even though the EU does export some of its production. China is far and away the largest producer globally and is largely self-sufficient.

In the case of urea, some major consuming regions rely heavily on imports. India imports around 30% of the urea it uses, and Brazil close to 100%. Many African countries also import very high shares of their urea consumption, even if the quantities are small in absolute terms.

In the event of supply shortages and rising prices, it is these highly import-dependent regions that will feel the effects earliest and most severely. Farmers may respond to scarce supplies by purchasing and using less fertiliser, which could have a negative impact on crop yields for the next harvest. This can compound and extend the short-term impacts of the current food crisis and hamper efforts to respond to high food prices by booting domestic production.

As the United Nations Global Crisis Response Group noted last week, the present distortion of food and fertiliser markets is most acutely affecting wheat and vegetable oil crops, with Africa set to bear the brunt of the impacts this summer. If low availability and high prices for fertilisers persist into the next planting season, the world’s most consumed staple – rice – will be the next major crop to face pressure, affecting billions more people in Asia and the Americas.  

Production, consumption and trade of urea in selected countries and regions, 2020

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Production, consumption and trade of ammonia in selected countries and regions, 2020

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What can governments do? Different tools for different timeframes

The current energy and food crises have both short- and medium-term implications. Governments need to move quickly and decisively on the near-term issues while working to address the longer-term ones.

Short-term responses concerning energy and fertilisers could include the following:

  • Enhance international dialogue and cooperation on energy and food supply security, including at the forthcoming G7 Leaders’ Summit. Phasing out trade restrictions on fertilisers can help reduce tensions in food markets. And international discussions should take into account the energy and food nexus.
  • Incentivise and enable food growers to increase the efficiency of nutrient use. Some regions of the world do not use enough nitrogen fertilisers and some use too much. The practices embodied in the “4Rs” of nutrient stewardship – applying the right fertiliser source, at the right rate, at the right time, in the right place – can reduce pressure on fertiliser markets by lowering demand without reducing crop yields, or by increasing crop yields with the same application rates. 
  • Alleviate pressure on natural gas and oil markets by adopting short-term measures to reduce demand. In response to the energy market disruptions resulting from Russia’s invasion of Ukraine, the IEA provided a range of recommendations for policy makers to rapidly reduce natural gas and oil demand. These measures can help ease the strains in energy markets and bring down prices, thereby reducing some of the impacts on fertiliser and food markets described in this commentary.

Considering the limited LNG export capacity additions expected between 2022 and 2024 and the overall lack of strong policies to transition to alternative fuels, the current tight conditions in global natural gas markets may continue in the medium term. This would mean persistent pressure on margins and operating costs for fertiliser producers, along with continued high prices for consumers.

Measures to alleviate these pressures in the medium term could include the following:

  • Design sustainable support structures for insulating the most vulnerable citizens from high food prices. Subsidies and transfers should be designed in such a way that they can be sustained beyond the coming months, should they be needed. Careful design of such subsidies should avoid the unintended consequences of simply shifting or amplifying the exposure to higher prices to other parts of the world’s population. Some low-income countries in the Middle East and Africa are already in the midst – or on the brink – of acute food shortages. Advanced economies have a moral responsibility to consider these countries’ circumstances and ensure their policies do not worsen the situations they face.
  • Redouble efforts to replace the use of fossil fuels in the food supply chain with secure, sustainable sources of energy. Decarbonising ammonia production can have the twin benefits of reducing both CO2 emissions from fertiliser production and also the industry’s reliance on natural gas from Russia and elsewhere. Reducing the use of fossil fuels elsewhere in the food supply chain – notably farm equipment, freight and packaging – presents similar opportunities.