- A natural gas shortage around the world has led to a spike in energy costs that is going to have a significant knock-on effect on food and fuel
- One major impact of higher natural gas and coal prices has been a spike in the price of fertilizer, which will cause food prices to rise
- A tighter supply of corn will also increase the price of ethanol used for blending into gasoline
Consumers all over the world have already started to feel the pinch of the global natural gas crisis and surging prices in Europe and Asia. Households in Europe are paying much higher gas and power prices, while nearly half of U.S. consumers are bracing for a 30-percent jump in winter energy bills as they primarily use natural gas for heating.
The pain for consumers won’t stop with higher winter energy bills. The natural gas price surge has also triggered price increases for global food and fuel. Both are set to jump in the coming months, partly due to the indirect effect of record-high gas prices, which are curtailing production of critical components for the food industry and agricultural commodities.
“This winter’s big chill could be felt far, long and wide,” The Wall Street Journal’s Jinjoo Lee wrote in an article this week.
Indeed, soaring gas prices are not only directly raising energy bills for households. They are also indirectly impacting the global food supply chain, the effects of which could still be felt as far away as next year. That’s because of the reduced production of fertilizers that would lead to tighter supply and potentially influence the decision of farmers on which crops to plant next year in a bid to reduce the pain of high fertilizer costs.
In mid-September, giant European firms from chemicals and mining to the food sector said sky-high gas and electricity prices were hitting their profit margins and forcing some of them to curtail operations.
Related: Money Managers Are Throwing Their Weight Behind The Oil Price Rally Lower fertilizer production is not only sending fertilizer prices soaring, but it is also hitting the food supply chain because ammonia and nitrogen production has carbon dioxide (CO2) as a byproduct. CO2 is widely used in the food industry to make soft drinks and in the packaging of perishable foods.
For example, CF Industries, a manufacturer of hydrogen and nitrogen products, said in mid-September that it was halting operations at both its Billingham and Ince manufacturing sites in the UK due to high gas prices.
The Billingham plant makes carbon dioxide, so the UK government secured a short-term deal with the company, which produces 60 percent of the UK’s CO2, to ensure the continued supply to businesses and avoid food shortages.
“Soaring natural gas prices have prompted shutdowns of fertilizer plants and have wide-ranging implications, not only for industry, but for farmers and global food supply,” Deepika Thapliyal at Independent Commodity Intelligence Services (ICIS) said on Tuesday.
“The rally in energy prices, especially coal and natural gas, have sharply increased agricultural input costs. This includes fertilizers, which have risen more than 55 percent since January, with several fertilizer manufacturers halting or reducing production capacity,” the World Bank said in its Commodity Markets Outlook this month.
“If energy and fertilizer prices do not stabilize next year as expected, food prices would be subject to upward pressures,” the bank said.
In Europe, the “chokingly high gas prices” are making the production of ammonia and fertilizers unprofitable, industry association Fertilizers Europe said early this month.
“If prolonged, this situation will lead to lower European fertilizer production and a tightened market situation which could affect next year’s agricultural yield,” the group added.
The European Commission presented on October 13 a toolbox to address soaring energy prices, yet this “does not solve the immediate crisis,” Fertilizers Europe said.
“Surging energy prices lead to reduced fertilizer production, higher input costs for farmers, and in turn food price spike. But fertilizer industry is not just about food for plants. Our industry is also a key supplier of AdBlue for heavy weight vehicles, CO? supply for meat and beverage industries to name the few,” said Jacob Hansen, Director General at Fertilizers Europe.
China, for its part, is said to have started to restrict, or at least closely monitor, its exports of fertilizers, which additionally tightens global supply and could lead to additional price shocks for food.
Tightening global fertilizer supply will not spare U.S. farmers, either, analysts say. Corn, wheat, and oats crops are sensitive to the amount of fertilizer used. In addition, more expensive—and a tighter supply of—corn, for example, would raise the price of ethanol used for blending into gasoline as per the U.S. Renewable Fuel Standard (RFS).
All in all, the record-high natural gas prices will raise heating bills this winter, steak prices next spring, and fuel prices next summer.