Understanding the Impact of Fuel on Food Prices
Understanding the Impact of Fuel on Food Prices
Why fuel isn't just about driving from A to B
I wrote an article about Understanding the Oil Supply Crisis where I covered why you can’t fix the crisis by simply demanding prices be lowered. This article aims to cover why the worsening fuel crisis has an exponential impact on the food supply chain resulting in a price disaster few can comprehend.
How logistics currently works: Just-in-Time
The Just-in-Time (JIT) model belies a hint in the name, but it does not merely work by products arriving ‘just in time’. Often, products are shipped halfway across the world, and take weeks to travel from one destination to another.
A good example of this are bananas. Bananas cannot be allowed to ripen whilst on their journey from one country to another. So cargo ships often have carefully controlled onboard climates to ensure the bananas remain in their unripe stage without allowing them to go rotten.
Such climate control systems use fuel to power them, as does the ship to transport them from A to B. However, the bananas still don’t arrive ripe when the ship pulls into port several weeks later. They must still be kept in carefully controlled climates as lorries and trucks transport the bananas to distribution centres up and down the country.
Of course, these lorries and trucks all consume fuel, both to drive, and to run their internal climate controlled systems, as does the power generation for the carefully controlled climate systems at the various specialist distribution systems designed to handle the bananas in question.
These distribution centres then hold onto the bananas in carefully controlled climates for a few weeks until supermarkets run low on supplies and request a new shipment of bananas to their stores from the distribution centre. Then another lorry - also consuming fuel for the climate controlled systems and engine - travels from the distribution centre to drop off the goods at the supermarket.
During this delivery the bananas are triggered to start ripening, so by the time they arrive - “just-in-time” - at the store, they are ready for consumers to eat, although you may find the bananas are still green. Within days the bananas ripen, and if unsold, over-ripen and become moldy.
The nature of the logistics system is such the food must arrive just-in-time. Too early and the consumer doesn’t buy it and it goes off. Too late and the product demand has dipped and so less will sell causing a backlog.
The distribution centres also have limited capacity, they don’t just house bananas, but all sorts of fruits, vegetables and other produce, of which is difficult - and expensive - to house for an entire nation. Just-in-Time came about to eliminate the real estate overheads of excessive storage space for food distribution networks.
Getting fresh produce in is extremely tricky, which is why stores prefer either tinned, frozen, or ready made foods. The “fresh” apple you’re eating may in-fact be over a year old in this model, and don’t get me started on the “fresh” cartons of juice.
What has this got to do with food and fuel prices?
As you can see, the entire distribution model is very fuel and logistics heavy, meaning a disruption anywhere in the supply chain, whether due to a backlog in shipping, a lack of space in distribution, or energy price rises forcing farms out of business all present risks. And where risks increase, so do prices.
You’re not simply paying for the cost to deliver the goods from A to B. You’re also paying to cool and store the good, and to transport it along indirect delivery networks. Each new vehicle is another fuel price point. A fuel price point that is added at every stage of the delivery network. Whether that’s in power used to refrigerate on-site or fuel used by the lorry to keep produce cool, you’re paying at every stage.
It doesn’t stop there, rather, to see where additional costs come in you have to go to the start…
Farms
If you’re imagining a horse and plough, it is a timeless image, but one sorely out-of-date with how most farms work these days. Tractors are big hulking machines, often with high-powered trailers designed to perform labour-intensive tasks.
It is no surprise these tractors consume vast quantities of fuel, and not surprising, given they have to drive through thick, muddy fields and pull very heavy equipment, for this is the nature of farming. Farms are large-scale, industrial processes these days, making use of advanced technology and machines to produce yields unimagineable centuries ago.
However, the first price point on fuel isn’t on the tractors, you may be surprised to learn… but on fertiliser import costs.
Fertile grounds
You may have wondered how fertiliser is even made. You probably imagined something like the farmer mucking out cows and pigs and using their manure for fertilisation, or composting food waste for re-introduction into the fields, and you’d not be wrong. These are known as ‘organic fertilisers’.
However, organic fertilisers are very small scale. There are simply not enough animals producing enough manure for use on fields, and even what they do produce isn’t of high enough quality to produce the kind of large yields farmers are after. So to get fertiliser in bulk of the quality you need, you have to switch to something else… industrialisation.
Industrial Fertilisers
There are three main categories of fertiliser:
Potassium Fertilisers
Phosphate Fertilisers
Nitrogen Fertilisers
Without detailing every single sub-type of fertiliser in each group, it is sufficient to say different plants prefer different types of fertiliser at different stages of growth.
Organic fertilisers mainly consist of nitrogen fertilisers, which isn’t much use to a farmer if they need either potassium or phosphate fertilisers for their plants.
Even if they wanted nitrogen fertilisers, to get the fertilisers they need, in the quantities required, they turn to industrialisation, which is where the fuel price problems enter the fray.
One of the more commonly used types of nitrogen fertiliser is “anhydrous ammonia”, which is produced from natural gas. In order to produce ammonia fertiliser you need a lot of hydrogen, and natural gas provides it in the format that is easiest to combine with ammonia to produce anhydrous ammonia.
Russian to disaster
This might not raise alarm bells until you realise the EU is trying to embargo pipelined Russian natural gas without any effective replacements, with a shortfall in natural gas, also comes a shortfall in fertiliser production (and don’t forget the Russian fertiliser blockades, either).
You either have to import liquidified natural gas (LNG) by ship - adding additional fuel costs to food production compared to pipelines - or you have to go without fertiliser for a substantive drop in yields, as is the case in the UK where now farmer Jeremy Clarkson reported farmers were leaving fields fallow - that is, completely empty - as fertiliser prices becomes too expensive for them to afford.
This means you pay additional costs for food in multiple ways:
You pay for the additional costs to import natural gas by ship overseas
You pay for the additional costs in demand as food supplies go down due to lower yields
You pay even more on both as demands on fertiliser goes up as food yields goes down
Of course, this is ignoring the industrialisation costs involved in the manufacture and distribution of pesticides and herbicides, where some farms even use planes for spraying, which is yet another fuel cost. Less pesticides can mean lower overall yields, causing even more price rises.
A summary on the ways you pay in terms of fuel cost
You pay for:
The natural gas used to produce the fertiliser
The fuel used to ship the fertiliser
The fuel used to plough the field
The fuel used to distribute the fertiliser on the fields
The fuel used to seed the fields
The fuel used to spray pesticides on the fields
The fuel used by the tractor and machinery to harvest the fields
The fuel used by the lorries to climate control and ship to a processing facility
The energy used by the processing facility
The fuel used by the lorries to climate control and ship to the port
The fuel used by the ships to climate control and ship to another port
The fuel used by the lorries to climate control and ship to the distribution centre
The energy used by the distribution centre to maintain climate control over the weeks of storage
The fuel used by lorries to climate control and ship to stores
The energy used by the stores themselves
The fuel used in your car to drive to the store and back
The energy you use for your fridge/freezer to preserve food
That’s a lot of fuel, that’s a lot of energy, and that, of course means, a lot higher prices on food. Remember, the apple is about a year old, which means, the food price on it is about a year out-of-date. Plan accordingly.
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