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Inflation and supply chain headwinds could blight Ukraine grain crop

Iryna Prodan
Iryna Prodan
Black Sea Agriculture Markets' Analyst, Refinitiv

What challenges face Ukrainian farmers as they grapple with higher mineral fertiliser prices and restricted supplies that threaten to lead to lower grain crop yields in 2022?

  1. Ukrainian farmers faced two serious problems purchasing mineral fertilisers ahead of the sowing campaign under the future 2022 grain crop: soaring prices and limited supplies.
  2. Therefore, grain production in Ukraine in the next 2022/23 season (July-June) may be much lower compared with the current 2021 grain crop, which was a record harvest.
  3. One possible solution is for Ukraine to import mineral fertilisers. However, the problems facing Ukrainian farmers are also affecting many parts of the world, so this brings with it further complications.

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In early October, the price for ammonium nitrate, one of the main types of fertiliser used for securing higher yields, reached UAH 20,000 per tonne FCA-plant in Ukraine, which is 100 percent higher than at the start of the year.

The primary reasons behind this rise in mineral fertiliser prices are skyrocketing natural gas and electricity prices combined with low fertiliser stocks.

The impact of high gas prices on the Ukrainian grain crop

It’s not a local problem restricted to Ukraine, the roots of the price rises are global.

Factors include low seasonal stocks in Europe, strong demand from China and limited supplies from Russia, all of which has contributed to push global natural gas prices to a record high.

Figure 1: Aggregated Northwest European storage (Bel, Fra, Ger, NLD)

Aggregated Northwest European storage (Bel, Fra, Ger, NLD). Headwinds blight Ukraine grain crop
Source: Refinitiv Eikon

The European gas benchmark price at the Dutch TTF Hub reached $1,377 per 1,000 m3 as of 6 October, according to Refinitiv Eikon data. Meanwhile, European gas stocks are currently at a five-year low.

The average gas prices for Ukraine businesses in September reached a record high – UAH 18,468 per 1,000 cubic metres. Gas prices for October delivery could rise 60 percent month-on-month to UAH 30,066 per 1,000 cubic metres, according to the Ukrainian Energy Exchange.

Figure 2: Dutch TTF Day-Ahead Price

Dutch TTF Day-Ahead Price. Headwinds blight Ukraine grain crop
Source: Refinitiv Eikon

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Higher mineral fertiliser prices worry farmers

Surging mineral fertiliser prices make up around 35-40 percent of wheat production costs and this had led to concern among Ukrainian farmers. A farmer from Central Ukraine said that surging mineral fertilisers prices could hit the farmers’ economy and may cause the price of Ukraine grains and oilseeds in 2022 to rise.

Ukrainian farmers did not manage to create any decent stocks of mineral fertilisers for spring field work in 2022 because of the booming prices and tight fertiliser supplies.

Trading in Ukraine’s fertiliser market has slowed down. Discouraged by soaring prices, Ukrainian farmers have stopped purchasing nitrogen fertilisers. Spring 2022 in Ukraine could be the toughest period for farmers because this is when demand for mineral fertilisers is expected to reach its annual spike.

Demand for nitrogen fertilisers is likely to rise, but supplies may fall short, Ukrainian traders said.

The Odessa Port Plant (OPZ), one of the main producers of nitrogen fertilisers in Ukraine, announced it had stopped production on 20 September; Ostchem Group plants are still operating, but they have ceased trading their products; and DneproAzot, the leading Ukraine mineral fertilisers supplier, mainly of carbamide-ammonium complex, does not produce ammonium nitrate.

Is importing mineral fertilisers the solution?

Facing its own limited fertiliser supplies, Ukraine could try to compensate for the shortage through imports.

From January to August 2021, Ukraine imported 752,200 tonnes of nitrogen mineral fertilisers, which is 7 percent less than in 2020, according to Ukraine Custom Services data.

Nitrogen fertilisers from Belarus accounted for 46.19 percent of the total imports, with Poland supplying another 17.08 percent, and Georgia providing 7.96 percent. The remaining 28.77 percent was sourced from other suppliers.

Figure 3:

Ukraine nitrogen fertiliser imports, 2021 (January-August)
Source: Ukraine Custom Services data

However, global fertiliser supplies seem to also be tightening and many energy suppliers have collapsed due to the gas prices crisis.

The high prices have led to US CF Industries Holdings Inc., a global fertiliser supplier, closing its two plants in the UK in mid-September; the Norwegian Yara International ASA, one of the leading fertiliser suppliers, announcing a 40 percent cut in ammonia production in the EU; and the Spanish Fertiberia Group reducing ammonia and carbamide production and suspending operations at two plants.

“It is not easy to buy nitrogen fertilizers in Ukraine now, so we are constantly searching for alternative suppliers abroad to meet the demand from Ukrainian farmers,” оne trader said.

The Agrarian and Land Policy Committee in the Ukrainian Parliament decided to ask the government to take control of the fertiliser imports to prevent fertilisers shortage and a further hike in prices; they hope it might avoid possible delays in field works and the planting campaign next spring.

Many farmers polled by Refinitiv analysts believed that this crisis could cause Ukraine grain production in 2022 to decrease due to the soaring fertiliser prices.

Grain yields may fall if nitrogen fertiliser limitations persist next year, and agrarian technologies could not be properly used. It is vital that these problems facing the Ukrainian grain crop are resolved quickly.

A Ukrainian farmer said: “Nitrogen fertilisation is crucial for securing better grain yields because it is of a higher quality than other fertilisers.

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