Prices far worse in good old days

The fertiliser price has risen dramatically as the world faces an energy crisis.

Fertiliser is an extremely important global commodity for more than just farmers.

Improvements in agricultural science and specifically affordable access to inorganic fertilisers has enabled the world to meet the needs of an ever-growing population.

There have been lots of headlines in recent times of fertiliser prices reaching record levels.

This is a big risk for farmers, as it increases the cost of planting a crop.

However, is the price really at record levels?

When looking at long datasets, it is worthwhile deflating them to consider inflation.

A dollar spent in 1960 is worth more than a dollar in 2021.

The charts show the real and nominal prices for urea since 1960.

These values are starting to ride up.

If we look at the values considering inflation, we can see that even the 2008 rise is nowhere near the same levels experienced in 1974.

What drove prices to those levels in 1974?

Another energy crisis?

The current high fertiliser costs are driven by the increasing cost of energy.

This is a similar pattern to the past.

Energy was the primary driver during the largest rise in fertiliser pricing during the 1970s.

While I personally was only a twinkle in my father’s eye during this period, it was a time of great upheaval in the energy sector.

The 1973 oil crisis resulted from an embargo by OPEC on nations that had supported Israel in the Yom Kippur war.

Fertiliser is produced through energyintensive processes.

A supply shock and increasing energy costs caused fertiliser prices to go rampant.

But we are nowhere near facing the same level of energy issues as the world experienced during 1973.

The annual change in fertiliser pricing for DAP (diammonium phosphate) and urea is shown in the chart.

It is important to note that the pricing data used is the annual average.

We will see the value for 2021 increase as the pricing continues to remain high.

The high prices that we experience this year will hurt farmers but, in real terms, they are not yet as high on an annual basis as in the past.

All this does not really help the fact that, in nominal terms, prices are still high.

If we look at wheat as an example, pricing levels in real terms are not far off the lowest since the early 1960s.

It is going to be a tough time on the fertiliser front, but just imagine how bad it would be if the situation was as bad as the early 1970s.

My big concern is not for the short term.

Prices will revert to normal (hopefully) in the fullness of time.

My major concern is about the transition to renewables.

While I support clean energy sources, the transition to renewables must be conducted with a planned approach.

Currently, the world is a long way off being prepared to switch off coal and gas. If we switched to 100 per cent renewables too quickly, then we could expect higher fertiliser pricing.

• Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)