CropLife Latin America: Impact on availability of agrochemicals worldwide

Date:11-16-2021

In 2020, many countries declared agriculture as an essential or priority activity that allowed flexibility in restrictions on the transit of people to enable mobility and serve the agricultural sector.

Consequently, the volume of inputs used was consistent with the cultivated areas.

But the gradual global economic recovery, including that of China, came amid shortages of raw materials, freight transport problems, and the onset of what is now considered an energy crisis. The availability of agrochemicals in Latin America does not escape this reality.

The Colombian Ministry of Agriculture has estimated, "The price of the most relevant agricultural inputs in Colombia has been affected in the last year by the increase in the international price of raw materials, depreciation of the exchange rate and factors that affect the supply, such as the increase in demand from large consumers such as China and India and restrictive measures by some fertilizer exporting countries due to COVID-19."

Data from the Ministry of Foreign Trade (Secex) of the Ministry of Economy of Brazil reveal that the phytosanitary products formulated are mainly from the United States (US), China and India. In volume, China accounted for 32% of the total in 2020, leaving the US and India in second place with 11% each. It is not surprising that the problems of raw materials, transportation and energy that China suffers impact in Latin America.

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The new global challenges will possibly impact the availability of agricultural inputs, as various logistics, raw materials and energy factors at manufacturing sites may compromise their supply.

Merchandise transports

The pandemic’s spread globally introduced serious logistics problems that raised freight costs for virtually any manufacturing sector.

In 2020 there was a shortage of cargo ships, delays in ports due to lack of manpower caused by restrictions on people’s mobility, closures due to outbreaks, and layoffs in multimodal companies. Maritime trade flows tried to follow official reopening, while some merchandise was left far from where it belonged. Retail e-commerce took a significant share of the burden in response to the “stay-at-home” economy.

The transition to 2021 brought an unprecedented increase in container demand while some sectors witnessed oversupply in anticipation of new pandemic waves. There was a saturation of ports that operate within their capacity or more. These factors also influenced an increase in the storage cost due to the increase in the waiting time at docks. This situation affected 80% of maritime world cargo transport, according to the United Nations Conference on Trade and Development (UNCTAD).

The result was the rise in freight costs that is causing problems in the supply of some products. According to the World Container Index, the ocean freight price in July 2021 increased more than four times compared to the value in July 2020. The Colombian Ministry of Agriculture estimates that the global container shortage has caused an increase of 300% in the freight price, and October 2021 estimates that the rate of a container from China jumped from US$2,000 to $8,000.

The increase in freight prices has a more significant impact on developing countries that have less capacity to pay. South America is mainly affected by its distance from China and its poor return of full containers. One established practice was to charge the cost of retaining the container, for the entire route to guarantee availability.

While some actors in the chain have been able to absorb or mitigate these costs, with inventory surpluses for example, at some point, the final consumer could bear the brunt of this increase in costs.

Raw material shortage

The uncertainty of world trade in 2020 resulted in a drastic fall in demand for raw materials, resulting in significant price reductions, which reduced their supply. Also, manufacturing rotated towards pandemic care products, such as medicines and disinfection, which captured precursors for agricultural inputs. In addition, manufacturing catered to the preferences of consumers relegated to staying at home.

Another factor that directly affected the availability and prices of agricultural inputs is the price of hydrocarbons such as oil and natural gas because they are manufactured or synthesized on a large scale, near important fields far from Latin America.

The barrel of crude rose to 65%. In the US, gasoline is the most expensive since 2014. Natural gas rose 30%, impacting the price of fertilizers that doubled in the international market. In countries like Colombia, the Ministry of Agriculture reported that its local fertilizer industry is 84% dependent on urea, DAP and KCI for local manufacturing.

China's coal shortage and power outages also affected the fertilizer supply chain. Initially, phosphate and nitrogen fertilizers were restricted, but that Asian country suspended their exports.

China's energy policy could impact the supply and price of agrochemical intermediaries and active ingredients. There is already an impact on factories in Yunnan and Jiangsu provinces, where yellow phosphorus production serves as raw material for glyphosate, acetate and malathion. The situation affects to a greater extent the price of glyphosate, its intermediaries and raw material such as glycine, because its extraction requires a lot of energy.

China is also an essential source of raw materials and intermediaries for manufacturing industries in the US, Europe and India. Thus, the increase in prices of precursors has a cascading effect on the other manufacturing countries.

The inclement weather has also contributed to affecting the availability of agrochemicals. In the US, Hurricane Ida caused destruction in regions with chemical industry plants, including glyphosate plants. Just recently, the glyphosate factory in Luling, Louisiana, announced the resumption of production.

There has already been an increase in the price of glyphosate. For example, the price of technical material in Brazil doubled as of September 2021. Some US farmers are already preparing for reduced availability of herbicides by 2022.

The impact will be practically for all of Latin America, which is a net importer of pesticides. For example, according to IBAMA of Brazil (2019), around 72% of the active ingredients in agricultural pesticides marketed in that country are imported, either formulated or in the form of technical products to be formulated in the country. This is also seen by the Colombian Ministry of Agriculture, which considers that China, Russia, India and the US are the largest suppliers of agricultural inputs while the rest of the world, including Latin America, are "price takers."

Energy

The availability of raw materials and product manufacturing suffered during 2021 because some countries pointed to a “green” economic reactivation. This was the case of China, considered the largest emitter of greenhouse gases in the world. The Asian giant committed to the UN to reach its emissions peak in 2030 and achieve carbon neutrality by 2060.

China seeks to reduce its dependence on coal for its energy matrix, which is around 57%. The Asian giant has already closed many mines due to pollution and security in the past, and anti-corruption measures in that sector. Similarly, it has shut mines to clear the sky during special times such as the Centennial of the Communist Party or its National Games.

But now, China has launched a "Double Control" policy with strong state regulations on the availability of coal and electricity supply to reduce intensive use and overall consumption. The implementation of the policy is in charge of its provinces through a credit program determined by the efficiency and reduction of energy use.

The results measured in 2021 were lower than expected, so the Chinese government made a classification of critical provinces to impose more severe consumption restrictions by controlling the price of electricity and increasing the price of coal. Provinces considered critical had a reduction of up to 90% in energy availability for the rest of 2021.

With the limitations in the availability of coal to generate electricity, the generating plants experience losses both due to the increase in the cost of coal as a raw material in the order of 400%, and the state control of rates.

Heavy rains and floods aggravated the situation forcing the closure of mines in Henan and Shanxi, provinces with great coal extraction. In addition, China has closed the import of Australian coal due to tensions between the two countries.

The State order intended to correct the coal shortage and extract more coal in two provinces to adjust prices without affecting residential or agricultural use. The reduction in energy generation has resulted in shortages, blackouts and the consequent closure of factories.

The most significant impact has been in Jiangsu, Guangdong, Zhejiang, Anhui and Sichuan provinces where there is important manufacturing in the chemical sector. However, the situation may impact the entire chain of agricultural inputs due to how the product is sold between manufacturers.

The increase in the price of active ingredients occurs because chemical factories limit their number of days of operation. Their raw material suppliers were also affected by blackouts and increases in energy bill costs. Chinese chemicals bought in the US have risen 20% between January and September 2021 and could continue rising.

This will have a greater impact on agriculture if commodity prices decline. The international price of corn, used for animal feed also impacts the energy price due to its demand for ethanol production. However, the cost of corn in turn, is affected by that of hydrocarbons as it is a substitute.

CropLife Latin America perspective

CropLife Latin America, its associated companies, and its network of associations have followed and collaborated with the different initiatives and discussions with governments to mitigate the impacts on the supply and distribution of inputs to farmers.

For the current harvest cycles, there may be supply problems of punctual inputs, which would be remedied with remaining inventory stocks.

Although 2021 saw favorable food prices that allowed farmers in Brazil or the US to absorb the increases in their inputs, 2022 may be different if commodity inventories increase and their prices fall.

If so, the farmer may find himself with less money to pay for inputs and seek other phytosanitary control options as he does not have the margin to absorb his input costs. The situation can even trigger a change in cropping patterns if farmers stop planting some crops that require intensive fertilizer use, such as corn.

For the subsequent harvests in 2022, it is not easy to make a forecast. It will be essential to evaluate the most recent import data from the countries and their domestic production results, and monitor the real impact of the restrictions imposed on Chinese plants.

Additionally, exchange rates also affect prices that have suffered significant devaluations in the region. This translates into the need for more local currency to meet obligations in reference to international currencies, such as the dollar.

The current supply scenario highlights the importance of seeking medium and long-term solutions, such as faster registration of new active ingredients and changes of origin, while restricting import policies for agricultural products without scientific and legal support, such as Europe. With a modernized regulatory framework for agrochemicals, there would be a greater supply and diversity of suppliers and sources of agricultural inputs, with the potential to improve agriculture's responsiveness to supply challenges.