Insight – Farm, food costs rise due to higher energy prices

4 March 2022

Rising energy prices since mid-2020 and throughout 2021 have pushed up the cost of farm inputs, particularly fertiliser. Conflict between Russia and Ukraine in 2022 has put further upward pressure on energy prices.

Energy price rises are being caused by:

  • a sharp rebound in global energy demand following the easing of the COVID-19 pandemic
  • a lack of investment in new oil and gas supplies
  • geopolitical tensions and export restrictions by some countries
  • increased freight costs and delays.

Russia is a major global producer of energy and fertiliser. If sustained, the Russia-Ukraine conflict is highly likely to lead to further energy and fertiliser price increases.

Implications for Australian exporters

Australian farmers are not alone in experiencing high input costs. If sustained, this price pressure on farmers across the globe will affect profitability. It will also place upward pressure on international food prices. Food prices are already at their highest level since April 2011 (Source: FAO, 2022).

Australian producers and exporters are likely to benefit from increased food prices. However, increased input costs will offset some of these gains.

The impact of higher input costs on Australian agriculture

Agricultural production needs energy. Energy is used directly by machinery and indirectly through inputs such as fertilisers, herbicides and pesticides. This means production costs and farm profits are sensitive to changes in energy prices.

The impacts of high energy prices vary across commodities. Crop production is typically more energy-intensive than livestock production. This is because crops consume more fertiliser and need more mechanised operations. For crops like oats, wheat and barley, energy and fertiliser make up about half of total operating costs.

Table 1: Average estimated fertiliser, fuel and grease production costs per Australian farm for selected commodities (2020–21)

Commodity

 

Fertiliser cost ($)

Fuel and grease cost ($)

Total cash costs ($)

Fertiliser and fuel costs as a percentage of total cash costs

Beef

9,134

16,014

333,867

7.5%

Cropping

158,547

78,069

1,097,641

21.6%

Dairy

62,781

20,463

874,572

9.5%

Sheep

26,162

15,616

322,679

12.9%

Source: ABARES, 2022. This table was built with the ABARES Farm Data Portal Table Builder.

Rising energy prices

Between 1 July 2020 and 1 March 2022, energy prices have increased substantially:

  • Oil prices have risen by 158% (US$40/barrel to US$103/barrel).
  • Coal prices have risen by 530% (US$50/tonne to US$315/tonne).
  • Natural gas prices have risen by 174% (US$1.67/MMBtu to US$4.57/MMBtu).

Figure 1: Spot energy price index (1 January 2020 to 28 February 2022)

Figure-1

Rising fertiliser costs

Rising global energy prices have caused substantial increases in fertiliser prices. Between January 2021 and December 2021, the average Free on Board (FOB) price of Australian fertiliser imports rose by 128%, from $380/tonne to $867/tonne.

  • Urea prices have increased from $256/tonne to $1,026/tonne.
  • Mono-ammonium phosphate (MAP) increased from $420/tonne to $952/tonne.
  • Potassium chloride (MOP) increased from $357/tonne to $822/tonne.

Prices have continued to rise in January and February 2022.

Figure 2: Australian fertiliser imports FOB price (January 2021 to December 2021)

Figure-2

In 2021, Russia and China introduced export restrictions on fertiliser to secure domestic supply. This has constrained global supplies and contributed to global fertiliser price rises.

Favourable seasonal conditions in Australia have led to increased plantings and higher prices. As a result, the value of Australian fertiliser imports rose from $1.65 billion in 2017 to $3.75 billion in 2021.

Implications of the Russia-Ukraine conflict on energy and fertiliser prices

The Russia-Ukraine conflict is highly likely to further increase energy and fertiliser prices. The conflict will also cause disruptions to global energy and fertiliser supplies.

In 2020, Russia was the world’s:

  • second largest exporter of crude oil (11.9% of global exports)
  • third largest coal exporter (15% of global exports)
  • fourth largest liquified natural gas exporter (8.7% of global exports).

Russia is also the world’s largest fertiliser exporter (12% of world exports). Australia’s direct fertiliser imports from Russia are low (4% of total fertiliser imports). However, the flow-on effects of reduced Russian fertiliser exports are likely to lead to increased prices and reduced fertiliser supplies in Australia.

Figure 3: Australian fertiliser imports by country (2017 to 2021)

Figure-3

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