Analyst insight: Industry at risk as CF close Billingham

• UK feed wheat futures (Nov-22) settled at £263.75/t yesterday, down £3.20/t from Tuesday’s close. The Nov-23 contract closed at £250.00/t, dropping £2.50/t over the same period.
• UK futures tracked continental prices, with Paris milling wheat (Dec-22) closing down €4.00/t yesterday, settling at €322.00/t.
• Chicago maize futures climbed for the sixth consecutive session yesterday, following reports that hot and dry weather throughout key crop development periods could lead to reduced yields across the U.S. The Dec-22 contract closed at $258.76/t, up $0.79/t on the previous day’s close.
• According to data released this morning by AHDB, 587.2Kt of home-grown wheat and 279.3Kt of home-grown barley was held by merchants, ports, and co-ops as stock at end-June, 17% and 16% up on the year respectively. Imported wheat and maize stocks were also 19% and 11% higher than year earlier levels respectively. To view the information in full, click here.

Impact on fertiliser and CO2

Yesterday afternoon, CF Industries announced that they will ‘temporarily halt’ production of ammonia at their Billingham site, citing uneconomical market conditions as the reason for closure.

The company will import ammonia to continue running the ammonium nitrate (AN) and nitric acid upgrade facilities. Therefore, CF anticipate they will be able to fulfil all contracted orders of AN in the coming months.

Nearby UK natural gas futures are currently nearly five times higher than this point last year.  Given the rapidly increasing cost of gas, anecdotal information suggests that if current gas prices were used to produce fertiliser, we could see AN prices doubling from the contracted prices of between £650-£850/t for AN trading earlier this summer. This will place a greater reliance on imported Urea and liquid UAN products for the foreseeable future.

This closure will have a significant negative impact on the availability of CO2 domestically. CF has notified it’s CO2 customers of the intended shutdown, with no specific date given, but at that point CO2 production will halt.

This will significantly increase the need for imports at a time when fertiliser plants across the EU are also closing, in light of high energy market prices. The UK’s other major CO2 producer, Ensus, is due to close for routine maintenance in September for a number of weeks. This will further tighten the availability of CO2 for agricultural, food and industrial purposes.

Given the time of year, with the run-up to a busy Christmas period being exacerbated by the FIFA World Cup, this is going to add significant further strain to an already exhausted food supply chain.

Impact on sectors

Cereals and oilseeds

Arable farmers across the UK have already been experiencing soaring fertiliser costs over the past six months due to increases in natural gas prices, as a result of the war in Ukraine. With CF ceasing production completely at its Ince plant this year, domestic availability of fertiliser had already been tightened. Fertiliser manufacturers across Europe are also struggling with the rising costs of production. This begs the question, where will the required ammonia be imported from and at what cost? With the tight supply in Europe, it is highly likely that domestic fertiliser prices will remain high for at least the mid-term. We also need to question the potential for lower physical availability of fertiliser impacting applications in spring 2023?

As well as this closure having an obvious impact on fertiliser prices for arable producers, the shortage of CO2 domestically will also impact slaughter of poultry and pigs. In turn, this will affect demand for cereals for animal feed.

Pork

Over the past year, staff shortages at abattoirs led to pigs being rolled and kept on farm longer. With rising feed and energy costs, this heavily impacted producer margins, with some producers exiting the industry all together. While these backlogs have abated, the cost of production remains high. If slaughter capacity was to be compromised, this would put producers back into an incredibly challenging situation. With soaring costs, this situation may not be sustainable anymore for many and will likely lead to further reductions in pig numbers and potentially more leaving the industry altogether.

Poultry

The poultry sector is already struggling with rising input costs and the impact of inflation on consumer demand. Therefore, a shortage in CO2, or a rise in the cost of it for slaughter, may well lead to a further reduction in poultry production. With poultry the largest consumer of cereals out of all the feed sectors, this will have an impact on cereal demand too.

Livestock/Dairy

Forage availability and quality this year is lower than usual, due to the hot dry summer we have seen. Some producers did not apply typical levels of fertiliser to pasture this season due to the rising cost. As with arable farmers, the closure of the CF plant will continue to impact the price of fertiliser for livestock producers. Given those challenges, there will likely be a heavier reliance on substitute feeding of livestock compounds/straights. In turn, margins for producers will be squeezed further.

In addition, the shortage of the CO2 that this closure brings with it, will also affect processing, with it being used in meat packaging and preservation processes.

What this means

In the short-term, we will see a tighter CO2 market, which may impact the ability of abattoirs and processors to flow animals and product through the supply chain. Longer-term, the impact of high energy markets and the potential of even higher fertiliser prices – or a lack of availability  – puts 2023 UK food production at significant risk.

As we have seen from this summer, our weather is getting even more variable. The market impact, coupled with another severe weather event in 2023, would lead to a significantly negative cost outlook for levy payers.

Whilst this is a new and evolving news story that will take time to filter through to the market, it has never been a more important time to review your farm businesses risks and level of preparedness of the impact of these events. Tools such as Farmbench, the Farm Business Review tool, the nitrogen fertiliser adjustment calculator and our regular market analysis provided on the AHDB website, can help to better understand your business, and understand this latest industry-wide black swan event.

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