Recent developments in oil and gas prices once again illustrate, unfortunately in a rather dramatic way, how strongly economic systems are influenced by geopolitical events. This dependency becomes particularly visible in agriculture. Rising energy prices directly affect the profitability of farming operations and therefore also have an immediate impact on food costs..
Three cost areas are particularly affected: fuel for agricultural machinery, the production of fertilizers, and to a lesser extent crop protection products.
For a simplified calculation, a medium sized arable farm with 100 hectares of agricultural land was considered. Assuming the increase in energy prices observed over the last six months, the following additional annual costs can occur for such a farm:
• + €5,000 for diesel
• + €5,500 for fertilizers
Diesel is a key production factor in modern agriculture. Field operations such as soil cultivation, seeding and harvesting are predominantly carried out using diesel powered machinery. In simplified terms, diesel consumption in arable farming is around 100 liters per hectare per year. Over the last six months, diesel prices have increased by approximately €0.50 per liter (1).
Fertilizers are also highly sensitive to energy prices. Nitrogen fertilizers such as urea are produced through energy intensive industrial processes. Production is based on ammonia, which is synthesized through the Haber Bosch process. Energy, mainly natural gas, can account for 60 to 80 percent of fertilizer production costs (2).
The price of urea has increased by roughly €210 per tonne over the last six months. For this simplified calculation, a nitrogen requirement of 240 kg per hectare is assumed, of which 50% is supplied through purchased fertilizers, corresponding to about 260 kg of urea per hectare (3).
Pesticide costs are also influenced by energy prices, although the effect is generally smaller than for diesel or fertilizers. This is mainly due to petrochemical raw materials, energy intensive manufacturing processes and transportation costs.
When these additional costs are distributed across total production, the impact on wheat production costs becomes visible. With an average wheat yield of about 7 tonnes per hectare, a farm with 100 hectares produces approximately 700 tonnes of wheat per year.
The additional costs of €10,500 per year therefore correspond to roughly €15 per tonne of wheat. With a market price of around €220 per tonne, this represents a production cost increase of about 7 percent.
This example shows how closely energy prices and agricultural production costs are linked. For farmers, it is therefore becoming increasingly important to apply inputs precisely and optimize production processes.
Many of our clients are developing solutions that directly address these dependencies. Autonomous and electrified agricultural robots can significantly reduce the use of diesel powered machinery. At the same time, modern sensor technologies and precision application systems allow fertilizers to be used more efficiently and, in some cases, even enable the complete elimination of chemical pesticides.
Technological innovation can therefore help reduce structural dependencies in agriculture.
Sources:
(1) Kuratorium für Technik und Bauwesen in der Landwirtschaft: https://www.ktbl.de/
(2) Fertilizers Europe: https://www.fertilizerseurope.com
(3) KWS SAAT: (3) KWS SAAT: https://www.kws.com/de/de/beratung/bestandesfuehrung/duengung/duengung-weizen/