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558. FAO Food Outlook - Spillover Effects on Production and Prices of Fuel, Fertilizer and Other Commodities

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The Food Outlook, a biannual report of the FAO on global food markets released on June 9, noted that factors such as soaring input prices, climate, and market uncertainty stemming from the war in Ukraine could lead to a tightening of food markets and historically high food import costs. In addition to providing detailed analysis of supply and demand trends for each major commodity crop, the Food Outlook included a special features on the impact of the war in Ukraine on global markets, and the spillover effects on production and prices of fuels, fertilizers, and other commodities. In particular, the report warned that high input prices could prolong the already historically high food price levels and place a double burden on importing countries.

The special features analyzed global market trends for inputs and the ballooning cost burden of imports, with reference to FAO's Global Input Price Index (GIPI), which is rising faster than food prices (both are at all-time highs). The report also pointed to the possibility of a prolonged price spike in food markets as farmers hesitate to produce.

The commercial agricultural sector is energy intensive and heavily dependent on fossil fuels. The source of today's turmoil dates back to 2021, when energy prices began to rise. Rising energy prices drive up the cost of nitrogen fertilizers, which are produced primarily from natural gas. Nitrogen fertilizer is the most important agricultural input for increasing crop yields. Rising nitrogen N prices in the form of urea and ammonium nitrate had reached all-time highs by the end of 2021. This momentum continued into 2022, with prices of other important fertilizers such as phosphorus and potassium also rising. Export restrictions are expected to be extended through the 2023/2024 season as Russia, the world's largest fertilizer exporter, begins to squeeze supplies to world markets after the invasion of Ukraine. 

What this means is that if the current war is not resolved, the profit margins of the world's food (crop and livestock) producers will be compressed for some time. Not just fuel and fertilizer. As the costs of seed, feed, and pesticides rise, farmers may either cut back on their use of these or shift to planting crops that require less of them. Declining productivity and curtailed exports of food exports (especially wheat, rice, and maize) could have a major impact on countries that are highly dependent on imports of staple food crops through international markets. It is desirable to move toward a new equilibrium in which both input and food prices are stable.

FAO. 2022. Food Outlook – Biannual Report on Global Food Markets. Rome. https://doi.org/10.4060/cb9427en

Contributor: IIYAMA Miyuki (Director, Information Program)