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Webinar Recap: The Effect of Rising Input Costs in the Agriculture Industry

Vegetables
COVID-19
Price Trend
Grain & Cereals
Logistics
Jul 25, 2022
Written by
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Bojan Mijatovic
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In the webinar:
-Overview of increased input costs, including fertilizers, pesticides, and packing materials
-Effects of increased production costs on agriculture such as fertilizers, pesticides, labors, and packing materials
-Production cost breakdown of fruits, vegetables, and grains
-Tridge’s Intelligence and Data covering Production Costs
-Implications of rising input costs and alternative ways of farming to reduce input costs


Overview of increased input costs, including fertilizers, pesticides, and packing materials

  • According to the USDA FAS report in June 2022, fertilizer prices account for nearly one-fifth of the US farm cash costs, with an even greater share for corn and wheat producers. Of the top-three grains, maize was the most significant contributor to world fertilizer consumption (16.2%), followed by wheat (15.3%) and rice (13.7%). Fruits and vegetables together represented 15.8% of the world market.
  • Based on FAO Statistical Yearbook 2021 data, global pesticide use increased from 2000 to 2018 by about one-third to 4.1 million tons in 2018. The highest contributions came from Asia with around a 52% share, followed by the Americas, Europe, Oceania, and Africa.
  • Over the past two years, the pandemic created a perfect storm of packaging price increases, and the Russia-Ukraine conflict added to a supply gap in products from Ukraine. The value of timber exports from Ukraine and Russia reached almost USD 12B in 2021. 

Effects of increased production costs on agriculture-fertilizer, pesticides, labor, and packing materials

  • According to the USDA FAS report from June 2022, China, Russia, the United States, India, and Canada produce more than 60% of the world's fertilizer nutrients. Russia and the United States each make less than 10% of global fertilizers, while China has approximately 25%.
  • Ten countries produce 70-95% N (Nitrogen), P (Phosphorus), and K (Potassium) fertilizers. 
  • Potassium production is the most concentrated. Two-thirds of all potassium reserves come from only three countries: Canada, Russia, and Belarus. Canada produces approximately one-third of the global potassium supply, while Russia and Belarus account for one-third also.
  • Because crop production uses these three macro fertilizers in combination, almost every country relies on obtaining their fertilizers from the few countries with available fertilizers.
  • The leading fertilizer exporters fall along the line of the highly concentrated producers: Russia, Canada, the EU, China, and Belarus export more than 60% of all fertilizers. Canada, Russia, Belarus, Morocco, and the US export more than 90% of potassium fertilizers. Given that there are just a few exporters, disruptions from any major exporters may cause significant fertilizer shortages and price increases.
  • Fertilizer dependency: Brazil, Canada, and Mexico heavily depend on imported fertilizers, importing more than 60% of fertilizer. More than 25% of Mexico and Brazil's fertilizers come from Russia and Belarus.
  • Pesticides production: China is the largest producer, exporter, and consumer of pesticides. In Q1- 22, China exported 532,500 mt of pesticides, down 8.79% in volume YoY, with an export value of USD 2.834B, up 63.86% in value YoY. The average unit price increased by 79.73% YoY.
  • Increasing labor and packaging costs are a growing concern in agriculture. Fruit and vegetable harvest involve ample labor and transportation, and truck drivers have been short in availability. Supply chain disruptions are affecting the food and packaging industry, with limited supplies of packaging materials, including glass, containerboard, and aluminum.

Fruits, vegetables, and grains production cost breakdown

Percentage of input costs in bananas and potatoes production

Source:Bojan Mijatovic Tridge

  • The volume of production dictates fertilizer and pesticide usage. For fruits, bananas consume the most fertilizer by a considerable margin, requiring a whopping 427 pounds of nitrogen, phosphate, and potash fertilizer per acre of cultivation, followed by citrus fruit. Based on various sources and focusing on main input costs, fertilizer can consume up to 48% of input cost, followed by hired labor with 20.3% and pesticides with 18.2%. Other expenses fall under 10% of total input usage.
  • On vegetables, potato production requires less fertilizer with 27.3% share, but more pesticides are involved in input cost with 28.2%. Seed and storage costs combined make around 42% of total production costs.
  • Pesticide consumption, especially raspberries and strawberries, takes the lead in fruit sectors, while potatoes dominate in the vegetable department. According to the USDA, strawberries are the crop treated the most with pesticides in America. On average, 300 pounds of pesticides are applied to every acre of strawberries (compared to an average of 25 pounds per acre for other foods).

Percentage of input costs in maize production and 2020-22 comparison

Source: FarmDocs daily

  • Maize was the most significant contributor in fertilizer consumption, followed by wheat and rice. Maize contributes to 47% of the US fertilizer use. A rough calculation of maize input costs showed that in the worst-case scenario, up to 43% of fees go to fertilizer, then seed with 23.2%, followed by pesticides with 17.8%. All other expenses, like hired labor, drying, crop insurance, and storage, total 16.1%.
  • Based on the USDA data monitoring of maize costs in the last three years, a significant rise in fertilizer value stands out. Compared to 2020, expenses climbed by 60.83%, while the YoY increase was 50.32%. Pesticide costs increased 21.79% compared to 2020 and 18.75% YoY.

Tridge Intelligence Data-importance of price data and the Tridge platform

  • The bottom line of rising input costs reflects in the wholesale prices. On the Tridge platform, comprehensive data and intelligence in food & agriculture can be found.
  • Data analysis and Tridge analysis depict valuable and reliable comments of different data sets, including prices, export, import, and production, with various products and markets related to food and agriculture.
  • Local Insights from the on-field managers and in cooperation with Market Analyst gives a clearer picture of ag-prices and what drives them.

High Input Costs Pushing Up Costa Rican Pineapple Prices Despite High Supply

Mexican Lemon Prices on The Rise Due to Abnormal Weather and High Cost of Fertilizers

Asparagus Price in Spain Skyrockets due to Production decrease and High Input Costs

Local Inflation and Increasing Production Costs pulling Iranian Rice prices higher

Corn Price in Colombia Surges Because of Low Supply and High Input Costs

Export bans and logistic problems

  • Restrictions and bans on fertilizer export are impacting global supply. Russia initially imposed restrictions on nitrogen, phosphate, and potash fertilizer exports until June 2022, effectively removing nearly 15% of the worldwide supply. In July 2022, restrictions were lifted.
  • Belarus - a significant source of potash for the EU, South America, and the U.S. - who is not exporting its potash because of troubles getting the product through the port of Klaipeda in Lithuania.
  • China restricted fertilizer export in an effort in 2021 to stabilize local demand.
  • Fertilizer prices started rising in 2021, but many producers avoided the surge because the fertilizers used for the 2022 planting season were purchased before price hikes. Farmers who bought fertilizers in 2022 had to appropriately adjust their fertilizer mixes to match the planted crop acreage, minimizing their fertilizer expenditures.

Implications of rising input costs and alternative ways of farming to reduce input costs

  • For grain producers, some alternatives include crop change (such as soybean) because it requires less fertilizer. For some farmers, rising input prices may result in the overall acreage planted, while others choose to change crop mix or apply other practices. Brazil reduced Q1-22 fertilizer import by 15% YoY, which will negatively impact second corn crop production for 2022. SSA countries have already reduced fertilizer use due to the short supply, low stocks, and high prices. The rising cost of grains resulted in export bans in Algeria, Egypt, India, Kazakhstan, Kosovo, Ukraine, Russia, and Serbia.
  • For fruits, a change in plantings or switching to other crops is not an easy option. The increased cost of production may cause a lack of supply and deterioration of the quality of fruits and vegetables. In general, prices are likely to have a more profound impact on 2023 planting decisions for grains, while the rise of prices of fruit and vegetables will depend on consumers' demand and purchasing power.
  • Alternative methods of farming can help farmers to cope with rising input costs. Sustainable agriculture, GAP-good agricultural practice, crop rotation, and soil analysis with efficient nitrogen use are just some ways to reduce fertilizer and pesticide use. Any techniques of lower fertilizer usage like vertical farming, aquaponics, hydroponics, and intelligent agriculture will help reduce the total volume of inputs. Finally, governments and other financial institutions should consider changes in the subsidiary systems in favor of lower input use and more efficient production.

Panel Discussion:

How Have Fuel Costs Contributed to Increased Agricultural Input Costs?

(Ferhat) Nitrogen is the most essential nutrient, and it is closely tied to the price of natural gas, which increased in 2021, caused by a post-COVID-19 increase in demand. High natural gas costs continued in 2022, fuelled by the Russia-Ukraine conflict, which was reflected in nitrogen fertilizer prices mirroring natural gas prices. Agriculture is highly dependent on fossil energy, directly via petroleum derivatives like gasoline, petrol, and lubricants and indirectly through natural gas, coal, and electricity needed for agrochemicals and fertilizer production.

How Have Countries Reacted to Address Increased Energy Prices?

(Ferhat) Governments approached various methods of helping farmers and consumers: subvention payments for harvesting, improving availability of food, reduced rates of value added tax, energy rebates to households, and cutting tax rates to help families. On the other side, politicians encourage people to save individual energy consumption.

How Has COVID-19 Changed the Transportation Industry in Mexico?

(Francisco) COVID-19 hit hard not just globally but also in Mexico via increases in freight costs and reduced imports and exports. Many companies reduced production and experienced collapsed billing processes and suspension of essential activities in the transportation sector. The pandemic still impacts the economy, both local and global.

How Has Increased Transportation Costs Affected Agricultural Trade?

(Francisco) The number of shipments has decreased. One reason is the increase in the final product price, which lowered demand; the other is inflation that hiked freight costs. Some essential products rebounded after COVID, while the main impact was on fuel, transportation, and lack of containers. Some estimations are that shipments decreased by 25%.

What Are Possible Ways to Reduce Transportation Costs?

(Francisco) Optimize orders, take better routes with a shorter delivery time, a good plan of activities, and the best option in cost/time ratio. Other things that can help are better strategic planning, inventory and storage control, good relationships with suppliers, and focus on the logistic performance process.

What Are the Potential Solutions to Increased Energy Costs?

(Ferhat) Implementing renewable energy in transportation cost. More effort in balancing the geo-political situation and avoiding Covid lockdowns disrupt supply and demand. Manufacturers should improve energy efficiency in production and use alternative fertilizers like bacterial nitrogen-fixating solutions to reduce artificial NPK fertilizer dependency.

Q&A:

Is there a difference between the ammonia used as fertilizers and ammonia for industrial use?

Ammonia may be used as a fertilizer by diluting it with water (1:1 ratio), as nitrogen is derived from ammonia. There are trade regulations for ammonia in the agriculture industry. Therefore, ammonia must be handled carefully. The conversion process is explained on page 9 of the 2022 Aquaponics Report.

What regions/countries experience a higher impact of higher agricultural costs?

Divided by regions, North America (Mexico) and South America (Brazil, Colombia) along with East and West Africa, followed by South East Asia, were hit the most. Mexico, Brazil, and Colombia have a high import dependency on complex fertilizers, and cereal production requires high fertilizer usage. Farmers cope with fertilizer shortages for various reasons, such as logistic problems and export bans. The direct effect is either higher input costs or no fertilizer at all, which directly influences the yield of crops and eventually lack of supply and supply higher prices. In the East Africa region, crop conditions have deteriorated in many areas. Prolonged droughts and adverse effects of the Russia-Ukraine conflict due to high dependency on imports of grains and fertilizer endangered food security. In West Africa, Nigeria, and parts of Guinea, there is a concern for the 2022 primary cereal season. In conflict-affected areas, there is limited access to fertilizers, reflecting on planting decisions and influencing current crop yields and quality. In Sri Lanka, the sowing of second (Yala) rice and maize crops have finalized under favorable weather conditions but with fertilizer and fuel shortage due to an intense economic crisis, which will reflect in lower yields and higher wholesale prices of these commodities.

The slides can be viewed here.

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