Agriculture is the world's third largest consumer of energy. With the Green Revolution following the Second World War, mankind discovered how to synthetically produce nitrogenous fertilizer and consequently dramatically increase volumes of food production. Nitrogen is perhaps the single most important plant nutrient essential for the synthesis of protein - the most important building block of life.
Unfortunately the synthesis of these nitrogen fertilizers requires massive amounts of natural gas. Around 90% of the variable cost of fertilizer comes from the natural gas consumed in this industrial process. To put that into visual perspective, it takes around 1 litre of crude oil to make 1 kilogram of nitrogen fertilizer (urea).
The price of urea, agricultures cheapest source of nitrogen, has increased by around 50% since the end of October 2006 from around US$210/t to US$300/t and reflects the huge demand emerging for fertilizer relative to the actual capacity of existing plants to produce. Shortages are evident on the sub continent in India and Bangladesh and even affluent markets such as the UK (until after March).
Potash supplies may also come under pressure as a second mine has succumbed to flooding in Canada , the world’s number one supplier of this essential plant element. This follows a similar event in a Russian mine late last year. Judging by the manner in which the share price of the world’s foremost potash producer, Potash Corp. (POT.TO) has inflated over the last 6 months (CA$85 up to CA$175), demand is anticipated to be robust and likely lead to significant price rises
So it clearly evident capacity constraints are restricting agriculture’s ability to ramp up production simply because price signals have emerged to attempt to do so. The mining boom has shown it is much harder to increase commodity production after years and even decades of restricted infrastructure investment and poor economic returns. In fact since the boom in metals prices begun in earnest a couple of years ago, Australia has not managed to increase output of any of these commodities.
This input cost inflation clearly has ramifications for farmers around the world despite rising prices for nearly all staple food commodities. Incomes have the potential to rise significantly in good years, and bad years will cost a lot more than they have in the past. In other words the risk of farming has ratcheted up to a point where particularly in marginal areas, there is no provision for failure. And with weather risk increasing the need for land use change is now at its greatest in history.
Somewhere along the line, man forgot to consider that it could be dangerous to develop a global model of food production that was intrinsically linked to the non renewable resources of oil and natural gas. Even more recklessly, our plant breeders proceeded to breed crops with the assumption that cheap oil would always be around. Crops have been programmed to focus more on yielding food and less on competing with pests and diseases. The advent of fossil fuel based pesticides cleared away biological impediments to production such as insects and diseases. To use an analogy, commonly bred and grown crops are now effectively naked in nature. They simply could not survive without oil based inputs and man. And whats more, most commonly grown crops only live for one year and require replanting again the following year by big machines that burn thousands of litres of diesel.
Unfortunately the synthesis of these nitrogen fertilizers requires massive amounts of natural gas. Around 90% of the variable cost of fertilizer comes from the natural gas consumed in this industrial process. To put that into visual perspective, it takes around 1 litre of crude oil to make 1 kilogram of nitrogen fertilizer (urea).
The price of urea, agricultures cheapest source of nitrogen, has increased by around 50% since the end of October 2006 from around US$210/t to US$300/t and reflects the huge demand emerging for fertilizer relative to the actual capacity of existing plants to produce. Shortages are evident on the sub continent in India and Bangladesh and even affluent markets such as the UK (until after March).
Potash supplies may also come under pressure as a second mine has succumbed to flooding in Canada , the world’s number one supplier of this essential plant element. This follows a similar event in a Russian mine late last year. Judging by the manner in which the share price of the world’s foremost potash producer, Potash Corp. (POT.TO) has inflated over the last 6 months (CA$85 up to CA$175), demand is anticipated to be robust and likely lead to significant price rises
So it clearly evident capacity constraints are restricting agriculture’s ability to ramp up production simply because price signals have emerged to attempt to do so. The mining boom has shown it is much harder to increase commodity production after years and even decades of restricted infrastructure investment and poor economic returns. In fact since the boom in metals prices begun in earnest a couple of years ago, Australia has not managed to increase output of any of these commodities.
This input cost inflation clearly has ramifications for farmers around the world despite rising prices for nearly all staple food commodities. Incomes have the potential to rise significantly in good years, and bad years will cost a lot more than they have in the past. In other words the risk of farming has ratcheted up to a point where particularly in marginal areas, there is no provision for failure. And with weather risk increasing the need for land use change is now at its greatest in history.
Somewhere along the line, man forgot to consider that it could be dangerous to develop a global model of food production that was intrinsically linked to the non renewable resources of oil and natural gas. Even more recklessly, our plant breeders proceeded to breed crops with the assumption that cheap oil would always be around. Crops have been programmed to focus more on yielding food and less on competing with pests and diseases. The advent of fossil fuel based pesticides cleared away biological impediments to production such as insects and diseases. To use an analogy, commonly bred and grown crops are now effectively naked in nature. They simply could not survive without oil based inputs and man. And whats more, most commonly grown crops only live for one year and require replanting again the following year by big machines that burn thousands of litres of diesel.
No comments:
Post a Comment