2023-Public-Sector-Perspectives

Fertilizer accounts for 30% of the variable cost of wheat production, so the spike in fertilizer prices has made it significantly more expensive to grow food. Higher fertilizer prices mean farmers can only afford a suboptimal amount of fertilizer, resulting in smaller harvests. Farmers will be forced to cut back on fertilizer at the worst possible time when they should be seeking to enhance crop yields. In Africa alone, the fertilizer shortage is expected to cut food production by at least 20% or $11 billion. 5 The underuse of fertilizers is not just a short-term problem. Fertilizers remain in the soil for some time, so underapplication will constrain yields and put upward pressure on prices for years to come. The impact is exacerbated in emerging markets, where access to capital is more constrained and the commodities forward market may be limited (compared to developed country forward markets which not only have greater depth but also transact a wider variety of products). More effective markets mean that farmers in developed markets can access funding at the time they need it most in order to buy the fertilizer and other input products that maximize yields. Farmers in developing markets do not have this opportunity. 3. Energy crisis Aside from natural gas being the main cost component in fertilizer production, it is also an important driver of household budgets and — perhaps more importantly — has a significant impact on inflation. According to Jerome Powell, Chair of the Federal Reserve, every $10 increase in the price of a barrel of oil generally results in an increase in the inflation rate of 20 basis points. 6 Following Russia’s invasion of Ukraine, oil prices spiked to more than $123 — up around $47 from the beginning of the year. By Powell’s reasoning, energy prices alone have driven inflation up by close to 100 basis points. 4. Rising inflation According to the World Bank, 92.9% of low-income countries, 92.7% of lower-middle-income countries, and 89% of upper-middle-income countries had inflation of more than 5% in mid-2022, with many experiencing double-digit inflation. Soaring inflation inevitably increases costs throughout the food supply chain and impacts the price of meats, fresh produce, dairy and other produce, further jeopardizing people’s ability to feed themselves and their families. Families may be forced to make a tradeoff between food and other needs, potentially increasing food insecurity and reducing the impact and adequacy of food programs already in place. 5 https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-board-approves-15-billion-facility-avert-food-crisis-51716 6 h ttps://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/energy-prices-push-inflation-higher-dashing-hopes-for-near-term-peak-69273293 7 https://www.weforum.org/agenda/2020/10/climate-change-poor-hardest-how-protect-them/ 5. Climate change In the longer term, the challenge of ensuring food security is intensified by the agriculture sector’s extreme vulnerability to the mounting impacts of climate change. With a changing climate, crop yields will become more volatile, with unusually low global production in some years and occasional bumper yields. While bumper yields might sound positive, they can lower food prices due to increased supply and in turn lower investment by farmers, impacting overall production in subsequent years. The negative impacts of climate change are already being felt, with increasing temperatures, more variable weather, shifting agroecosystem boundaries, a growing prevalence of invasive crops and pests, and more frequent extreme weather events. Substantial investments in adaptation are required to maintain current yields and to increase production and food quality to meet growing demand. Lower-income economies are likely to continue to face the biggest impacts as they often depend on agriculture or natural capital (such as soil, water and ecosystems), which are vulnerable to a changing climate. With fewer financial resources to facilitate adaption, emerging markets are inevitably more vulnerable. In the richest countries, the share of hours lost could be 1 to 3 percentage points higher in 2050 compared to today; in the poorest countries working hours lost could be 5 to 10 percentage points higher. 7 Substantial investments in adaptation are required to maintain current yields and to increase production and food quality to meet growing demand. Citi Perspectives for the Public Sector 23