Brace Yourself for Inflation

Commentary, Economy, Gerard A. Lucyshyn

Inflation, simply put, is the overall decline in the value of money. As prices increase the less each dollar is worth. The larger the increase in the price of goods and services, the more individuals are required to spend each year on living expenses — housing, fuel, health care, and most importantly food.

Last year Saskatchewan’s crop production fell almost 47%, the largest drop over the last 20 years. While 2022 crop production is forecasted to improve, producers are facing spiking fertilizer costs causing them to rethink the types of crops they will be planting and possible yields in the upcoming year.

Approximately 82% of Alberta growers apply primary nitrogen fertilizer at seeding, while in Saskatchewan over 78% of canola acres and 97% of spring wheat acres receive in-soil placement of phosphorus at planting. 

The global price for fertilizer increased by 132.7% over the previous year (November 2020) making it the largest year-over-year increase on record. Expectations for 2022 predict no slowing reduction in the climbing of fertilizer prices. The rapid price increase appears to be a result of increases in the price of coal and natural gas, as well as major export restrictions imposed in China and Russia.

In September 2021, China banned phosphate exports until June 2022 in response to growing concerns over surging power prices and food production costs. As a key global supplier of approximately 30% of the global fertilizer trade, China’s decision has left many countries, such as India, Pakistan, and others in Southeast Asia scrambling to find new fertilizer suppliers for 2022.

Russia imposed strict export quotas on fertilizers in December 2021. The quotas, in effect until June 2022, were in response to Russia’s growing concerns over domestic supply and as a part of an effort to contain price inflation in its agricultural sector. The export quotas have significantly reduced the amount of fertilizer being exported from Russia and have caused a significant impact on Brazil and the United States.

Fortunately, most Alberta and Saskatchewan producers are able to purchase fertilizer domestically, however, still at the mercy of global pricing. Rising fertilizer prices not only affect our domestic producers’ bottom line but such rising prices directly impact the prices and available supply at your local grocery store – this is known as food inflation.

The Canadian fertilizer industry’s annual production level is approximately 3.9M metric tonnes (2019); this places it in the top 5 fertilizer producers in the world. However, Canada’s production level pales in comparison to the other four: China (36.9M), India (13.8M), United States (11.3M), and Russia (10.3M). 

The fertilizer industry plays an essential role in Canada’s economy by contributing over $23 billion annually and employing approximately 76,000 workers. Canada exports of fertilizer  in 2019 include: United States, Spain, South Korea, China, and Mexico.

Companies that hold the largest market share in the Canadian fertilizer industry include: Nutrien Ltd., Yara International ASA, and CF Industries Holdings Inc. Nutrien Ltd. is a Canadian company based in Saskatoon, Saskatchewan, and is the largest producer of potash and the third-largest producer of nitrogen fertilizer in the world. Yara International ASA is a Norwegian chemical company with its largest business area being the production of nitrogen fertilizer. (Yara purchased Saskferco in October 2008.) Yara’s fertilizer production facility is located in Belle Plaine, Saskatchewan, and is one of North America’s largest single-line granulation facilities. CF Industries Holdings Inc. is an American manufacturer and distributor of agricultural fertilizers, including ammonia with an ammonia fertilizer production facility in Medicine Hat, Alberta.

Alberta and Saskatchewan fertilizer producers will certainly benefit from rocketing prices, but the general public should be concerned about how these rising prices will impact their ability to afford food. As the input costs of the food producers rise, those costs will be passed on to the consumer.

The Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI) are leading indicators of consumer inflation.

The IPPI reflects the prices that producers in Canada receive as goods leave the plant gate; it does not reflect what the consumer pays. The IPPI excludes indirect taxes and any costs that occur between the time a good leaves the plant and the time the final user takes possession of the good. This includes transportation, wholesale and retail costs. The RMPI reflects the prices paid by Canadian manufacturers for key raw materials and the price change for raw materials purchased by manufacturers. Those prices are mostly set in the world market. 

In November 2021 the IPPI increased 18.1% year-over-year and the RMPI increased by 36.2% year-over-year. Such increases have not been witnessed since the 1970s. 

The rapid food inflation in the 1970s caused public uncertainty and political tension regarding the availability and the price of food. The critical question at the time was “whether or not the end of (the) food surplus era had been reached and whether it is the beginning of the new era where food issues would pose a challenge to the people of Canada and the rest of the world.”  (**where is this quote from? If it isn’t a quote, remove marks and just ask it like it is.)This question led the federal government to form the Federal Food Prices Review Board, which eventually led to a Federal anti-inflation program.

In an inflationary environment, there are winners and losers. Investors, debtors, and wage earners come out ahead. Savers, creditors, and anyone living on a fixed income tend to get left behind. Brace yourself for inflation.

 

Gerard Lucyshyn is an economist and an economics lecturer in the Department of Economics, Justice and Policy Studies at Mount Royal University in Calgary, Alberta. He has also served as a business and economic consultant to a variety of industries. Gerard has authored a number of articles and research papers on municipal, provincial, federal and international economic and policy issues.