Farmers can't avoid high synthetic nitrogen fertiliser prices by switching to organic fertiliser

The New Zealand Herald reported yesterday:

New Zealand farmers face hefty increases in the price of fertiliser this spring as a result of the escalating US-Iran conflict and the war in Ukraine.

The Middle East plays a big role in the global fertiliser market because of its supply of natural gas and mineral resources.

Russia is also a major supplier of fertiliser.

Renewed hostilities in the Persian Gulf – and the virtual closure of the Strait of Hormuz – have driven oil prices up to about US$90 ($154) a barrel for Brent crude, the international benchmark.

Synthetic nitrogen fertiliser is generally manufactured from ammonia created using the Haber-Bosch process. This requires hydrogen, which is often derived from natural gas (mainly methane). Since the Middle East is a major supplier of natural gas, a lot of nitrogen fertiliser is manufactured in the Middle East. The current conflict in the Middle East is constraining the transport of nitrogen fertiliser from the Persian Gulf, reducing the supply of nitrogen fertiliser.

The effect of this on the market for nitrogen fertiliser is shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of nitrogen fertiliser traded of Q0. The Middle East conflict reduces shipping of nitrogen fertiliser, which decreases supply to S1. This increases the equilibrium price of nitrogen fertiliser to P1, and reduces the quantity of nitrogen fertiliser traded to Q1.

Can farmers avoid the higher price of nitrogen fertiliser by switching to an alternative product, such as organic fertiliser (compost, or manure)? Not really. Consider what happens in the market for organic fertiliser, shown in the diagram below. Before the change in the price of nitrogen fertiliser, the market for organic fertiliser was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of organic fertiliser traded was QA. Since nitrogen fertiliser and organic fertiliser are substitutes, and nitrogen fertiliser is now relatively more expensive (as shown above), farmers switch to the relatively cheaper organic fertiliser. That increases the demand for organic fertiliser from DA to DB, increasing the equilibrium price of organic fertiliser from PA to PB, and increasing the quantity of organic fertiliser traded from QA to QB.

So, the effect overall is that the price of both nitrogen fertiliser and organic fertiliser increase. Farmers cannot easily avoid high fertiliser prices. We can expect that to flow through into higher prices for farm produce, as well as lower profits for farmers.