The global agricultural sector is no stranger to price fluctuations, but several shocks have occurred in quick succession in recent years. COVID-19 related disruptions and shortages accompanying the global conflict, along with price increases, have contributed to further uncertainty for domestic farmers. But there is good news for agribusinesses grappling with these problems: A strong financial position has given the sector much-needed stability to move forward.
Even before the Russian invasion of Ukraine in February 2022, the agricultural industry had been grappling with global disruptions that led to shortages and price hikes in key inputs. Chief among them was the rapidly rising fertilizer prices in 2021.
Commercial fertilizers are a critical input to agriculture around the world, although specific requirements for type and application vary by region and crop. Fertilizer production relies on chemical inputs to create synthetic nutrients; Modern commercial fertilizers are made by mixing atmospheric nitrogen with hydrogen from natural gas to create ammonia, which is then typically mixed with phosphorus and potassium.
While the demand for fertilizers is global, the resources needed to produce them are not. Canada, Russia, and Belarus supply two-thirds of the world’s potassium. Similarly, China produced more than 35% of the world’s phosphorus between 2017 and 2019. This concentration of key materials means that disruptions in a few countries can increase global prices and lead to shortages.
An unfortunate combination of supply chain bottlenecks, natural disasters, and global turmoil has led to precisely this result. In late August 2021, Hurricane Ida disrupted chemical production on the US Gulf Coast. China implemented new customs inspections on fertilizer inputs in October 2021, and then restricted fertilizer exports in 2022 to protect your domestic supply. Meanwhile, the same pandemic-related delays that have slowed supply chains around the world have also affected chemical shipments. Conditions worsened further when the conflict in the Ukraine caused natural gas prices to rise. Subsequent sanctions on Russia and Belarus have contributed to fertilizer supply uncertainty due to their effects on natural gas supplies and, by extension, the availability of the ammonia needed to produce nitrogenous fertilisers.
As the figure below illustrates, nitrogen fertilizer prices, as measured by the Producer Price Index (PPI), increased by 77% from December 2020 to December 2021. The PPI measures changes in prices received by producers thus reflecting the costs of farmer inputs. Although the growth rate slowed slightly in January 2022, prices increased by 6.2% in March and 4.1% in April before finally falling slightly in May and June. Prices have remained fairly stable ever since.
Rising Prices: US PPI for Nitrogenous Fertilizers, Jan 2017-Nov 2022
SOURCE: Bureau of Labor Statistics.
Impact of Fertilizer Price Increases on the Eighth Federal Reserve District
How will these price increases affect producers in the Eighth Federal Reserve District? First, it is important to remember that agriculture has significant lags; Fertilizer for the 2022 planting season was purchased in 2021, and price increases will take even longer to pass through to consumers after harvest. However, these price increases are likely to be passed through, because crop prices and fertilizer prices are (unsurprisingly) highly correlated.
Despite these delays, changes in crop composition are already visible. Corn requires more nitrogen fertilizer than soybeans, because soybeans work with bacteria to extract nitrogen from the atmosphere (a process known as nitrogen fixation). Because of this, some farmers have changed their crop mixes with the goal of using less fertilizer, replacing corn with soybeans and other crops that require less fertilizer.
This effect is being felt throughout the Eighth District and nationally. As the figures below show, corn production in the region fell 7.8% from 2021 to 2022, while soybean production increased 6.6% during the same period. These numbers are drawn from state-level US Department of Agriculture (USDA) data and include states that fall wholly or partly within the Eighth District: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee. .
Corn Production in the Eighth Ward, 2003-2022
Soybean Production in the Eighth Ward, 2003-2022
SOURCE OF TWO FIGURES: USDA.
Nationally, the USDA August 2022 Estimates of world agricultural supply and demand report (PDF) lowered forecasts for July corn production and yields and raised forecasts for soybean production and yields. Similarly, the July 2022 Purdue University-CME Group Agricultural Economics Barometer report indicated that of the farmers planning to change their crop mixes, nearly half anticipated allocating a higher percentage of their acreage to soybeans.
To combat fertilizer price increases, regional farmers have banded together to collectively order fertilizer. The benefits of doing so are simple: Because the collective, or cooperative, can place a significantly larger order than any one individual, it can try to set prices that are more manageable for individual farmers. Regional farmers have noted that these unofficial purchasing structures have become more common as increases in fertilizer prices continue to affect corn and soybean farmers.
Summer 2022 shocks
Fertilizer prices are just one of the problems facing the agricultural sector. The lack of availability of mechanical parts has also been a challenge for farmers, as farm equipment is subject to the same raw material supply chain problems and computer chips that have hampered car production. Work also became a point of concern during the pandemic, although the end of pandemic-related travel and immigration restrictions has brought relief on this front.
More recently, weather events and commodity price fluctuations have created uncertainty in the agricultural sector. Drought in the southwestern US and flooding in the Great Plains have reduced production in both regions. Record heat and low rainfall led US cotton growers to reduce their cotton acreage last growing season; the USDA forecast a 28 percent lower national cotton crop than the previous year, marking the smallest crop since 2009. Although some areas of the Eighth Ward were affected by floods or droughts, the region as a whole avoided events large-scale disruptive weather conditions. during the 2022 planting season, which has helped corn and soybean production remain largely on a normal trend.
The agricultural sector endures shocks and price fluctuations as a matter of course. And while farmers may be worried about uncertainty, measures of financial stress indicate that the sector is in a better position than in previous financial crises. USDA debt service and debt-to-asset ratios have risen slightly in recent years, but remain well below where they were in the agricultural crises of the 1980s. The sector maintains ample liquidity and the Agricultural Credit Administration reports solid credit quality; the non-performing loan ratio hit a five-year low of 0.45% in 2021. While this measure rose slightly to 0.49% in the first half of 2022, it remains below the 0.79% recorded in 2019.
Self-reported measures of financial stability tell a similar story. While conditions have softened in recent months, agricultural producers are well off record lows. Purdue University’s Farm Financial Performance Index, which measures current financial conditions among farmers, stood at 91 in November, up from 86 in October. While down from 113 in December 2021, the recent upward movement reflects high crop prices and strong revenue expectations for the current year. Longer-term expectations are softer, however, with the Purdue University Farm Capital Investment Index at a record low of 31 in November. Reports from Eighth Ward growers sent the same message: While rising interest rates and input costs could affect the market in 2023, farmers remain on stable financial footing for now.
Eighth Ward Farmers Global Climate Disruptions
Fertilizer is a fundamental input for world agriculture. An untimely series of shocks has reduced the global supply of fertilizers and other farm inputs and increased delivery times, driving up prices and creating uncertainty for farmers around the world. Nonetheless, Eighth Ward farmers largely remain in a strong financial position. In response to rising fertilizer prices, they have adjusted the spread of their row crops and formed buying cooperatives to negotiate better terms of sale.
- See the June 2022 US Department of Agriculture report Impacts and repercussions of price increases on the world fertilizer market.
- Watch the December 2022 Purdue University-CME Group Agricultural Economics Barometer report.
- Again, see the December 2022 Purdue University-CME Group Agricultural Economics Barometer report.
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