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The Global Fertilizer Shortage Is Already Causing Havoc in Latin America

Summary:
Food prices were a huge problem across Latin America even before Russia’s invasion of Ukraine. Thanks to surging fertilizer prices, the problem is getting worse.  I would like to begin this piece with a brief recap of the recent political drama in Peru, where the fledgling Pedro Castillo government is already on the ropes less than a year after it was formed. A combination of rising economic pressures and growing discontent with both the government and the congress sparked major demonstrations in late March. What began as a strike by farmers and transporters against the rising prices of fuel, agricultural products, particularly fertilizers, and road tolls has plunged the country into yet another political crisis. Two Protests in One As in the case in so many places these days, there is

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Food prices were a huge problem across Latin America even before Russia’s invasion of Ukraine. Thanks to surging fertilizer prices, the problem is getting worse. 

I would like to begin this piece with a brief recap of the recent political drama in Peru, where the fledgling Pedro Castillo government is already on the ropes less than a year after it was formed. A combination of rising economic pressures and growing discontent with both the government and the congress sparked major demonstrations in late March. What began as a strike by farmers and transporters against the rising prices of fuel, agricultural products, particularly fertilizers, and road tolls has plunged the country into yet another political crisis.

Two Protests in One

As in the case in so many places these days, there is certainly plenty of dissatisfaction to go round. According to the left-leaning Spanish daily Publico, the recent protests in Peru are being driven by two ideologically opposed forces:

Teacher unions are demanding that the current president fulfill the reform program he set out when he won the elections. The right, for its part, continues to do its thing, pursuing its own interests amid the escalating tension and fomenting what it used to crack down on most severely: social protests. A regular demand of the protests, which reached their apogee in the middle- and upper-class neighborhoods of the capital, is the immediate departure of the Castillo government.

These are two protests of diverse origins, composition and demands, but ultimately they represent two flanks that threaten a government bedeviled by an incapacity to respond effectively, weak leadership and internal fractures.

The latest problems began with a nationwide truckers’ strike in late March. In Huancayo, a mid-sized city some 120 kilometers east of Lima, a demonstration culminated in pitched battles with the police. Three protesters died. On April 1, the protests reached Lima. Roadblocks were erected that caused shortages in many of the capital’s markets. Stores were looted and private property vandalized. Following three days of chaos President Castillo announced a national state of emergency followed by curfews in Lima and Callao.

Rather than stabilizing matters, the repressive measures merely underscored the government’s weak position. Within hours of declaring the state of emergency, the Castillo administration  repealed it following a cacophony of complaints that it was unconstitutional.

Since then the government has tried to cushion the impact of rising priced by eliminating taxes on fuel and food. It has also increased the minimum wage and offered additional subsidies to farmers. These containment measures have helped relieve the pressure but probably only momentarily.

Following a string of corruption scandals involving myriad governments, the Peruvian people have lost virtually all faith in the political process. Six of Peru’s last seven presidents, dating all the way back to Alberto Fujimori (1990-2000), have faced legal proceedings, investigations, convictions and even dismissal from Congress due to corruption cases. It is against this backdrop that Pedro Castillo, a virtual unknown, was able to take last year’s presidential elections by storm, narrowly winning the keys to Miraflores, Peru’s governmental palace.

But the Castillo government has had to contend with a largely hostile congress, which has blunted its ability to enact reforms. It has also been accused of its fair share of corruption scandals, with the result that patience is fast running out even among many of the government’s core supporters.

An even bigger problem for the Castillo government is that two of the main causes of the recent protests — surging energy prices and a severe fertilizer shortage — are almost totally beyond its control.

Spreading Economic Fallout from Ukraine

Russia, as is now common knowledge, is the world’s largest exporter of fertilizers.  Those exports are being impacted by surging energy prices, Western sanctions and the Russian government’s decision, in mid-March, not to export a string of products, including fertilizers, to so-called “unfriendly” countries. While Peru is not on that list, its imports of fertilizers have nonetheless been severely impacted.

The National Convention of Peruvian Agriculture (Conveagro), which represents the interests of agricultural unions and agricultural producers’ associations, has warned the country’s acute fertilizer shortage could cause food production in Peru to fall by as much as 40% in approximately three to six months’ time. What little supply is coming in costs 410% more than the normal price, according to Conveagro’s president, Clínico Cárdenas.

Conveagro has been warning the Castillo government about tight fertilizer supplies for the past five months, says Cárdenas. Global fertilizer supplies were already under serious pressure long before the Ukraine conflict began. In a meeting with the Deputy Economy Minister and Minister of Agriculture in November Cárdenas was told a solution would be found within eight months, but he says that “so far nothing has happened.”

Kawsachun News, the English-language channel of the Bolivian radio broadcaster Radio Kawsachun Coca, reported earlier this month that Peru’s government has asked for help procuring supplies of Urea from neighboring Bolivia:

Bolivia’s state-owned fertilizer plant will massively boost sales to Peru as President Pedro Castillo faces strikes and mobilizations over fertilizer shortages. The urea and ammonia plant in the Trópico of Cochabamba is set to cover half of what Peru has lost since Western sanctions on Russia began.

Peru’s Agriculture Minister, Oscar Zea, told the press on Sunday that, “We need 1.4 billion Soles [worth of fertilizer]; we have talked with the Ministry of Economy and Finance, where it was agreed that we are going to purchase this from Bolivia. They are close, and they now have 700 million Soles [worth of fertilizer] in available stock.”…

During the first quarter of this year, Peru imported 18,000 tonnes of urea. During the same period in 2021, the country imported 190,000 tonnes. The massive shortfall has caused prices to skyrocket.

Massive Dependence on Russian Fertilizers

Peru is not alone in feeling the effects of the global fertilizer shortage. As I reported on March 11, in “Latin America, As a Whole, Refuses to Embrace Total Economic War Against Russia, Latin America” is massively dependent on Russia for fertilizer components:

According to Statista, nitrogenous, potassium and mixed fertilizers together accounted for almost 40% of all Latin American imports from Russia in 2019. Other key imports include semi-finished steel (15%) and petrol (12%).

Higher prices and prolonged shortages of Russian fertilizers could have a severe impact on agriculture in the region, which is already suffering from spiraling input costs. If Russian fertilizers stop arriving in the region, the result will be even higher food prices for the foreseeable future.

As Quartz reports, Brazil, whose economy is already mired in a stagflationary recession, is the largest importer of fertilizer in the world:

Its top supplier is Russia—providing Brazil 22% of its imports. In October 2021, Russian fertilizer exports were restricted, following a fear of a shortage. The smaller export supply led to higher prices. In fact, right before the invasion, Brazilian authorities were in Russia trying to negotiate a deal. Now with war and sanctions, Brazil’s buyers may need to look elsewhere.

The type of fertilizer Brazil imports is a mixture of nitrogen, phosphorus, and potassium known as NPK. Farmers rely on the potassium, to prevent diseases in their fields. In Brazil, it’s used to grow soybean, coffee, and other crops. Soybeans are the biggest money-maker for Brazil, the majority going to China, and shortages could reverse recent gains in the relationship’s growth.

Brazil’s government is now negotiating to try to procure more potash from Belarus, which is easier said than done given that Belarus is also subject to U.S. sanctions. As Bloomberg reported on April 6, one way around this conundrum would be for Belarus to sell potash to the Russian market, which could prompt Russian companies to export more:

But as of today, Russians are not able to export sizable quantities, according to CRU Group analyst Humphrey Knight. Even amid all that distress, some vessels are slowly being booked to bring fertilizers out of Russia to Brazil, but the volumes are small and buyers are not disclosing details. Russia limited sales of its nutrients abroad and many ports and shipping lines balk at Russian freight.

Another Bloomberg article, from a day earlier, asserts that Brazil is scheduled to receive its final wave of much-needed fertilizer from Russia over the next few weeks, “before supplies plunge due to the Ukraine war”:

Dozens of Russian vessels laden with fertilizer are heading to Brazil, with a final ship unloading May 5, according to StoneX analysts. After that, it’s anyone’s guess where Brazil, which imports 85% of the fertilizer it needs, will get supplies as war disrupts shipments in Russia, the top supplier.

In Colombia, where Russian fertilizers account for around one-fifth of all fertilizers used, the government is trying to source alternative supplies from Canada. Argentina imports 61% of the fertilizers it needs. Fifteen percent comes from Russia, making it, like Brazil, vulnerable to the global shortages.

The situation in Mexico, where just under a third of the country’s fertilizer needs during the first quarter of 2021 were met with imports from Russia, is arguably even worse. Some growers in the states of Puebla and Guanajuato are reporting price increases of as much as 300%, reports Forbes Mexico.

“Those most affected by the increase in fertilizer prices are small owners,” Luis Eduardo González Cepeda, president of the Mexican Union of Agrochemical Manufacturers and Formulators (UMFFAAC). “We have worrying reports that some farmers have reduced the dose of fertilizers from 30% to 50%. In the Bajío region they have reduced the area planted, due to the uncertainty over the prices at which they will be able to sell their crops.”

A Deep-Rooted Problem

Food prices are already a huge problem across Latin America. As I’ve noted in previous articles, they account for a larger share of inflation indexes in Latin America than in advanced economies, meaning that surging food prices have played a larger role in overall inflation. And inflation is already at a 24-year high of 6.82% in Peru, a 21-year high of 7.45% in Mexico, a 19-year high of 11.35% in Brazil, a 6-year high of 8.5% in Colombia and a 14-year high of 9.4% in Chile.

In Mexico year-on-year prices of many of the foods that make up the basic food basket have skyrocketed. The average price of a kilo of onions, for example, has surged by 199% over the past year, according to monitoring by the Agricultural Markets Consulting Group (GCMA).. The average price of a kilo of lemons is up 114%. By the end of March the average cost of a basic food basket had risen by 13.4%, almost double the official inflation rate.

Latin America was already in the grip of a major food crisis before Russia’s invasion of Ukraine, largely but not only due to the economic fallout of the Covid-19 pandemic and resulting supply chain crisis. According to a paper published by the Pan American Health Organization in November 2021, food prices started surging long before the pandemic and have risen more than 18% on average in LA5 countries since January 2020.

“We must say it loud and clear: Latin America and the Caribbean is facing a critical situation in terms of food security,” said Julio Berdegué, FAO’s Regional Representative, in 2021. There has been an almost 79 percent hike in the number of people living in hunger from 2014 to 2020.”

Another global supply chain shock, this time involving fertilizers, would send agricultural costs and by extension food prices spiraling even higher. This partly explains why so many countries in Latin America are so loath to publicly support the economic war being waged against Russia: they are terrified of losing all access to Russia’s fertilizer exports.

For 2022, the FAO simulations project two possible scenarios. The first foresees an 8% increase in the price of wheat. The second, more severe scenario envisages a 21% increase in the price of all cereals, leaving 13 million more people facing famine conditions in Latin America . As we have already seen in Sri Lanka, when large segments of the population go hungry, political stability tends to crumble very quickly.

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