The Impact of Fertilizer Price Spikes on Fertilizer Use and Farm Profitability

Fertilizer use plays an important role in increasing agricultural production and ensuring food availability and economic accessibility: two critical components of overall food security. When global fertilizer prices skyrocketed in 2021-2022, those spikes brought with them concerns about drastically reduced fertilizer application and subsequent negative impacts on food production, prices, and food security.

While data regarding the impact of this shock on food production remains scarce, a new paper in Food Policy uses fertilizer demand and farm profitability as proxy indicators to explore the effects of rising fertilizer prices.

The study finds that while increased fertilizer prices did not significantly impact demand or profitability overall, those effects varied from region to region. Specifically, farmers in Africa experienced worsening farm profitability, implying that import-dependent regions are at greater risk from fertilizer price shocks.

A variety of factors contributed to the skyrocketing fertilizer prices seen in 2021-2022.

Demand for fertilizers was on the rise following the COVID-19 pandemic and associated lockdowns, and global fertilizer supply chains remained disrupted post-pandemic.

Natural gas and coal prices were also high at this time, driving up the cost of fertilizer manufacturing and even leading some plants to halt production altogether.

The outbreak of war between Russia and Ukraine further exacerbated the difficult situation as trade routes were again disrupted and economic sanctions limited supplies from major producing regions. However, as other importers stepped in to fill the gap, the impact of these supply disruptions was quickly eased.

Longer lasting impacts stemmed from export restrictions imposed by several major producing countries, particularly China and Russia.

Overall, aggregate fertilizer demand saw only a slight decrease as a result of these factors, according to the study results: from 202 million metric tons (MT) in 2020 to 196 MT in 2021 and 188 MT in 2022.

The study posits several explanations for this somewhat surprising finding.

In Africa south of the Sahara and other low-income regions, fertilizer use was already low even before the price spikes. For this reason, increased global prices did not have a significant impact on fertilizer demand. However, the authors point out, this does not mean that farmers in Africa, particularly smallholders, were fully insulated from the effects of rising global fertilizer prices. Many smallholders in the region reported reducing their fertilizer purchases during this period due to increasing prices, while others reported reducing their rate of fertilizer application, reducing the area to which the applied fertilizers, and selling assets or borrowing money to purchase fertilizers. Such strategies likely had an impact on both agricultural yields and farm profitability.

In higher income regions and large-scale staple producers like the United States, rising fertilizer prices went hand in hand with high commodity prices in 2021-2022. This meant that farmers still had incentive to purchase fertilizer because they were still receiving good prices for their crops. Despite rising fertilizer prices, farm profitability still had the potential to increase in these regions.

Several policy implications emerge from the study.

First, the concentration of global fertilizer production in just a few major producers remains a significant risk. While the events of 2021-2022 showed that smaller producers were able to step in effectively to fill the supply gap, this may not be the case in future shocks.  

Second, the close tie between energy markets and fertilizer markets could continue to play a role in future price shocks and will need to be monitored.
Third, data continues to show that export restrictions, whether on food or agricultural inputs, only exacerbate price shocks and price volatility.

Fourth, the high commodity prices seen in 2021-2022 insulated larger farmers from reductions in farm profitability and, by implication, from reductions in farm yield. However, for smaller farmers in fertilizer-import-dependent regions like Africa, farm profitability likely experienced negative impacts. Such import-dependent regions will continue to be at risk from future fertilizer price shocks.

Investing in the production and application of alternative, sustainable fertilizers could help mitigate these risks by reducing reliance on natural gas and coal and diversifying fertilizer producers and exporters. As an added benefit, sustainable fertilizers would also reduce the agricultural sector’s greenhouse gas emissions.

Sara Gustafson is a freelance communications consultant.