Fertilizer Costs and Supply Chain Issues Highlight the Need for Agility
By now, all sectors have been impacted by the ongoing global supply chain crisis. Agriculture is no exception, and understanding how and why the industry is being impacted can be challenging. Let’s connect the dots and get a view from a global scale all the way down to farm level.
What is actually happening?
The biggest issue for agriculture is that there is a shortage of fertilizer available to farmers around the world. Accompanying the shortage of supply, global fertilizer prices are skyrocketing to all-time highs, making it much more difficult for farmers to pencil in their potential profits for the upcoming season. Prices have increased 165% from last year, with a nearly 20% jump in the last month.
Several factors are exacerbating these cost and supply problems:
- Fertilizer production challenges: A high demand for natural gas, a key ingredient in producing nitrogen fertilizer, has increased production costs and reduced global supply. To make matters worse, in late August, Hurricane Ida shut down nitrogen production in parts of the United States.
- Ongoing issues associated with the COVID-19 pandemic: The effects of shutdowns and changing operating procedures in early 2020 are still impacting agriculture and many more industries.
- Labor shortages: Whether it’s the result of pandemic-related layoffs and burnout or some other factor, the US is facing a serious labor shortage across a variety of industries, including agriculture.
- Bottlenecks at ports: With pandemic disruptions, increased demand, and the nation-wide labor shortage affecting every stage of the supply chain, ships are stuck waiting to dock at ports full of shipping containers that need to be moved.
While agriculture is not unique in these disruptions, unfortunately it’s unlikely to bounce back to normal faster than other industries because food is essential for our growing population. If you look at other industries, like lumber for example, prices have also been high and volatile over the last two years, but they also tend to stabilize faster because lumber consumption can be adjusted more easily than food. In other words, when lumber prices skyrocket, new construction can halt or slow, adjusting the demand and creating a new equilibrium.
Global food demand is a different story; demand for food can’t be adjusted in the same way. We can either eat less food, eat different food, or try to use less fertilizer to grow the same amount of food in order to address demand and keep prices from skyrocketing. None of which can change quickly, if at all.
And let’s not forget the chart of all charts; with Earth’s population about to blow past 8 billion and projected to hit 10 billion by 2050, demand is unlikely to slow. The industry will need to be innovative and agile to address increased demand and the potential for future volatility. Food security and the global supply chain have a fragile dynamic that is still in full defensive mode from a ripple that started 21 months ago. Only time will tell us just how long this reverberation will last, but it seems unlikely that things will simply fall back in line.
In Minnesota, fertilizer accounted for about 25% of the per acre cost of production in 2020. This year, fertilizer could account for more than 50% of the per acre cost.
What about the global market?
The US isn’t the only country whose ag industry is feeling the fertilizer squeeze; Europe and Brazil are also experiencing shortages, rising costs, and supply chain issues made worse by how much of each region’s market is filled with imports. In the US, imported nitrogen makes up about 12% of the market. Europe imports about 29% of its nitrogen and Brazil a whopping 76%. How these markets will respond to high prices and supply issues remains to be seen, but one thing is certain: in an increasingly globalized world, it’s critical that we foster resilience and agility at home.
What does this mean for farmers in the US?
Unfortunately, farmer’s are stuck paying for fertilizer that costs 165% more than it did last year. Let’s look at central Minnesota as an example. In 2020, fertilizer accounted for about 25% of the per acre cost of production. This year, fertilizer could account for more than 50% of the per acre cost. While corn prices have also increased, they have not matched the increase in fertilizer prices, meaning growers will likely see an impact to their bottom line.
The good news is that growers have some options:
- Apply less fertilizer: Growers may risk taking a yield hit, but cutting back on costly and hard-to-source fertilizer applications is the simplest solution.
- Switch more acres to soybeans: Because phosphorus is more commonly a limiting nutrient for soybeans, replacing some acreage with soy could help growers reduce their nitrogen needs.
- Look to alternative nitrogen sources: Growers may want to take advantage of the natural nitrogen-providing powers of the soil microbiome instead of applying fertilizer. SOURCEⓇ, Sound’s microbiome activator, offers growers an opportunity to reduce input costs while maintaining yield.
Whatever decisions growers make in the face of these challenges, it’s worth remembering that so much of the agriculture industry relies on the global supply chain, and it’s not infallible. The best way to ensure food security and stability now and in the future is to build agile and innovative operations that can respond quickly to challenges.