Sensitivity of the Agribusiness Sector to Sudden Changes in the Prices of Energy Carriers on the Example of Poland: Current State and Challenges

Abstract

The article provides an overview of various studies on energy consumption in agriculture. The focus was in particular on the sensitivity of farms and agribusiness to fluctuations in the prices of energy carriers, which is currently a problem for the entire food industry. In addition to the prices of direct energy carriers, biofuels, the EU ETS system, and fertilizers were identified as the main areas that play a key role in shaping the direct and indirect impact on the economic performance of agricultural producers. Moreover, it was presented how sensitive the food sector is to the limitations of fertilizer production, during which by-products necessary in food processing are produced. The production of fertilizers consumes almost half of the energy used in agriculture, but the lack of fertilizers means yield drops of 30–50%. Therefore, high energy prices and disruptions in its supply are a threat to the food security of a country, both from the perspective of agriculture and processing. Based on the literature review, research gaps have been identified that should guide future research.

1. Introduction

The start of the war in Ukraine on 24 February 2022 was a date that had an enormous impact on the economic, logistic, and energy situation of the agribusiness sector. This sector of the economy, as well as many others, has been heavily pressured by the problems that emerged from the global COVID-19 pandemic. However, with the advancing war and economic turmoil, problems with energy carriers come to the fore. These problems concern both energy availability and the sharp increase in prices. The Russian invasion of Ukraine has led to renewed volatility in energy commodity prices, accelerated by low inventories. In February 2022, crude oil and gas price volatility increased as a result of the Russian invasion of Ukraine and related political responses amid increasing uncertainty over energy supplies. Crude oil and gas price volatility was amplified by low inventories, which made prices more sensitive to changes in energy supply and demand prospects [1]. It is a situation reminiscent of the 1970s. Since the first oil price shock in 1973, studying the effects of energy prices, especially crude oil, on macro- and microeconomic levels has become one of the most fundamental issues in economics [2]. The sharp increase in the prices of EU energy carriers, in particular natural gas, the main supplier of which was Russia, directly affects the agribusiness sector, causing problems with the availability of artificial fertilizers or the problem of profitability of production. The subject of the research was Polish agribusiness and its current situation during these rapid changes. Therefore, the article aimed to review the literature on the subject related to the impact of price increases on the functioning of the agribusiness sector in the EU and to identify research gaps that may be the subject of research in the future. The novelty of the article is primarily related to the indication of threats to agribusiness and the economy, which have not been described in the literature, but appear in economic practice. The work was divided into parts concerning the consumption of energy carriers, the sensitivity of farms to price increases, and the overall response of the agribusiness sector to these changes.

2. Methodology

Taking into account the extremely wide scope of the issue, the literature review was carried out according to the following scheme (Figure 1), and the following keywords are given in brackets.

The main literature review was conducted on two databases, Web of Science and Google Scholar, in the five areas shown in the diagram. In the case of the first four areas, a large amount of literature was found and practically every area would require a separate literature review. There were hardly any results related to the last area—the cessation of the production of artificial fertilizers. The publications that were found were concerned mainly with the depletion of phosphorus fertilizers, while information on nitrogen fertilizers was not available. Accordingly, the latest Google News related to this topic has been reviewed. In the case of Poland, it was found that in 2022 there was a visible increase in inquiries about fertilizers [3]. At the same time, a large number of publications in agricultural industry websites and business websites concerning the consequences of ceasing the production of nitrogen fertilizers were noticed. Therefore, the first four areas were treated as the background to the area where a significant research gap was identified.

3. Current state of Research

3.1. The Sensitivity of Farms (Fuel and Heating Costs)

Many studies in the literature discussed issues related to the energy of agriculture over the past decades. Researchers saw the multi-faceted link between agriculture and energy. The multifaceted nature of this relationship concerns such issues as changes in the prices of energy carriers, changes in means of production forced by changes in energy, or less clear-cut relationships regarding changes in the prices of water necessary for production or an increase in the demand for agricultural biocomponents for the production of biofuels [4].

Agricultural production consumes significant amounts of energy, especially in the production of field crops. As a consequence, energy prices affect production costs in the agricultural sector. Production costs are important for farmers’ net income (profitability), defined as the proceeds from the sale of their products minus the cost of their production. In addition, they influence farmers’ production decisions and what crops are grown. Energy consumption in this sector can be either direct, such as gasoline, diesel, crude oil, natural gas, electricity, and energy used to operate irrigation equipment, or indirect, such as for fertilizers or pesticides [5].

The energy used in European agriculture comes primarily from non-renewable energy sources [6]. Energy consumption in field agriculture in the European Union is at least 1435 PJ, which is around 3.7% of the total annual energy consumption in the EU, mainly from non-renewable energy sources [7,8]. About 55% of the total energy input comes from indirect sources, which are often not reported in official energy consumption statistics, suggesting that energy consumption is significantly under-rated [9]. The most energy-consuming activity in field agriculture is the use of fertilizers, constituting about 50% of energy inputs (

Table 1. Total energy inputs for selected open-field crops EU-27 (in PJ).

Crop	Seeds	Fertilizers	Pesticides	Diesel Use	Other	Total
Wheat	18	251	21	138	7	434
Maize	14	217	14	94	40	379
Barley	38	61	0	51	0	150
Potatoes	7	15	3	12	13	49
Sugar beet	0	15	2	11	0	27
Rapeseed	0	50	4	30	7	91
Sunflower seed	1	30	3	35	9	78
Soybean	2	5	1	8	3	18
Apples		3	3	7	1	14
Citrus		10	3	9	5	26
Olives		46	13	24	30	113
Vineyards		14	11	24	2	50
EU Total	79	716	75	444	116	1431

). The consumption of diesel oil on farms accounts for 30% of total energy consumption [10]. Other activities, including irrigation, storage and drying, the use of pesticides, and the use of seeds account for about 5% of the total energy input [11].

Each of the directions of agricultural production differ not only in the total energy demand but also in the structure of the demand for various energy carriers. Differences also appear in spatial analysis. The same crops grown in different regions of the world have different energy requirements [12]. The introduction of specific production systems, such as organic farming, also causes differences [13]. Taking into account all these variables, the research area related to this subject is extremely wide. The article focuses on the main conclusions that appear in numerous publications.

The most visible link between energy and agriculture concerns changes in the prices of energy carriers. Many studies carried out using econometric methods confirm the intuitive assumptions. The increase in the prices of energy carriers results in an increase in costs, an increase in production, an increase in the prices of agricultural products, as well as a decrease in agricultural income [14]. This translates into shocks to the entire agricultural market. A previous situation like this took place in 2007–2009.

3.1.1. Biofuels

The issue of the impact of changes in energy prices on the food sector through biofuels is relatively new. However, it appears more and more frequently in scientific works around the world. The research results are not unequivocal. Some studies indicate that the US and EU policies supporting the development of biofuel production led to an increased demand for maize and vegetable oils. Therefore, with the increase in the prices of energy carriers, in particular crude oil, the demand for these agricultural raw materials increases. It is the main mechanism of the influence of the prices of energy carriers on the increase in food prices [15]. There are also studies where this impact is statistically visible, but at an unusually low level [16].

3.1.2. EU Emissions Trading System (EU ETS)

The directive introducing the EU ETS was adopted in 2003, and the system began to operate on 1 January 2015 [17]. The main assumption of the system is to define the upper limit of greenhouse gas emissions, up to which emission is allowed for all participants of the system. Therefore, legal regulations create “emission permits” which give the right to emit 1 ton of greenhouse gases, defined as the equivalent of 1 t CO₂. These permits have a legal basis in this system, they can become the subject of property, exchange, and trade. The EU ETS covers 45% of all greenhouse gas emissions generated in the territory of the EU [18]. The operation of the EU ETS is supposed to be simple. By taking into account the costs of greenhouse gas emissions, the EU economy is to switch to low-carbon technologies, as it is economically justified. However, in the last two years, a problem has emerged that the system’s creators have not taken into account. Entities that do not have emission rights and must have them, can buy them. The problem is the sharp increase in the prices of these allowances. While in April 2020 the price of these allowances oscillated around EUR 20 per ton, in February 2022 it was almost EUR 100. In September, the price dropped to around EUR 65 per ton. The cost of these allowances strongly influences the cost of energy supplied to farms. Therefore, another problem appears—how does the quotation of allowances affect the functioning of agriculture? At the moment, the farms themselves are not covered by the EU ETS (although such proposals appear more and more often [19,20]), however, the increase in the prices of emission allowances indirectly translates into the economic situation of agriculture. It is mainly about the increase in energy prices. While there are numerous publications on the advantages and disadvantages of including agriculture in the EU ETS, it is difficult to find publications showing the impact of changes in the prices of emission allowances on the situation of these farms.

An example of unclear links between agriculture and the prices of energy carriers is the problem of water used for agricultural production. In the countries that are the largest food producers, water is not readily available, and many crops require more than can be naturally supplied. Thus, there is a need to extract the water and then distribute it. Both of these processes require energy. The mere increase in energy prices from the perspective of earning income does not translate into a decrease in agricultural income. The reason, however, is that the decline in yields is offset by the rise in prices. Although it may be less important for farmers, it is not for society as a whole [21]. However, another problem arises here. With the growing importance of the climate change process, more and more areas of the world become dependent on the use of groundwater, so this problem will increase in the coming years [22].

3.1.3. Fertilizers

The use of fertilizers in agriculture began at the beginning of the 20th century and is still growing. Currently, these fertilizers are necessary to maintain the current efficiency of agricultural production. However, their production requires an incredibly large amount of energy, especially the use of natural gas. It is estimated that the production of fertilizers accounts for 1/3 of energy consumption in agriculture [23].

3.2. Breakdown of the Supply Chain

In the literature on the subject, you can easily find publications specifying the effects of stopping the use of fertilizers and their impact on planning and reducing greenhouse gas emissions [24,25,26]. Less frequent publications are warning about the exhaustion of fertilizer production possibilities [27]. If this problem is already indicated, it is in the long term, amounting to 30–50 years [28]. The economic and logistical situation led to the possibility of complete cessation or limitation of the production of nitrogen fertilizers in the next few months. This would have catastrophic, not fully studied effects on agriculture, the entire agri-food sector, and society. These are not only theoretical considerations—at the turn of August and September 2022, there were announcements of such actions. As a result of a tenfold increase in the price of natural gas, the largest Polish (and Europe’s leading) producer of nitrogen fertilizers, Grupa Azoty, announced a reduction in production to 10% of the capacity. Another Polish company, Anwil, announced a complete halt to production. Similar signals come from the Norwegian Yara, the largest producer in Europe. Yara has limited fertilizer production in the Netherlands and stopped it entirely in Italy. Many other companies did the same (BASF, Borelis, OCI, Feriberi, CF Industries). As assessed by Fertilizers Europe [29], the situation is slowly becoming critical. The EU must act to ensure food security and food supplies for the citizens of Europe and the world.

The first consequence of stopping the production of fertilizers would be an immediate reduction in the production volume on farms. Since such a scenario is practically not taken into account, it is difficult to find research results in the literature on the subject. Based on the estimates of agricultural organizations in Germany, the decrease in yields can be determined at the level of winter and spring crops—40%, winter oilseed rape—50%, maize and sugar beets—30%, early potatoes—50%, and late potatoes—30% [30]. This is confirmed by the fragmentary results of research conducted in Poland [31]. Significantly lower yields of staple food would play a significant role, exacerbating the serious problem of rising EU inflation [32,33]. It should be remembered that the EU is the world’s leading exporter of food, therefore the problem of its availability (physical and economic) would apply to the whole world [34,35]. The effects of lowering food production are well described in the literature on the subject.

On the other hand, there are unforeseen effects that appeared at the last moment, after the decision to stop or limit the production of fertilizers. The lack of nitrogen fertilizer production also means the cessation of the production of by-products such as liquid carbon dioxide, dry ice, and sulfur gas, which are crucial for the agri-food industry.

Carbon dioxide is used in various technological processes in the food industry. Its most obvious use is in beverages, including beer. In the case of the brewing industry, CO₂ is used to ensure the hermeticity of vessels in the process of filling bottles, cans, or kegs. Due to its lack, one of the largest beer producers in Poland, Carlsberg Polska, announced that it was suspending beer production [36]. Likewise, carbon dioxide is used in the dairy and meat industries, where it is essential for the packaging of products. It is the main component of the mixture pressed into the packaging. It should be noted that this gas is also used in large slaughterhouses for the humane slaughter of animals. It is also used in the preservation of fruit and vegetables. Another problem is finding alternative sources of supply—due to the production process, raw CO₂ must be transported directly via pipelines from nitrogen plants to companies that process it. It cannot be transported in any other way, e.g., by cisterns [37].

Dry ice is widely used in the production and storage of food (cooling food components during the production process, cooling meat in butchers and processing plants, and quick freezing). Deficiencies in the production of dry ice will therefore harm the logistics chains of frozen products, which in turn will result in shortages of goods in stores.

Nitric acid is used to disinfect technological lines. It is used particularly intensively in the dairy industry, where hygiene standards are the most stringent. Not being able to clean the line means no production is possible. The problem is so significant that there is no possibility of discontinuing the production of these raw materials, and the Polish dairy, meat, and brewing industries only have supplies for 2 weeks of work. As this subject is new (late August/early September 2022), this part of the study was based on press sources and statements of representatives of individual sectors of the food industry, including the Polish Federation of Food Producers.

The result of the lack of these raw materials is easy to predict—there will be a reduction in the production of meat [38], cold cuts, drinks, and dairy products, which in turn will lead to a sharp increase in the prices of these products. The crisis will also affect farmers. Processing plants will suspend the purchase of animals for milk processing. These are types of production that are practically impossible to stop, as this would lead to huge losses for both farmers and processors. These links can be described as an exceptionally sensitive supply chain to shortages of strategic raw materials.

3.3. Price Increase for Products and a Drawn Bill

Problems with rising costs of energy used in agriculture are not only related to direct production. They also cause other problems that have not been investigated so far. The sharp increase in prices may result in the complete cessation of production in some of the most energy-consuming sectors of agricultural production. The first example is the production of greenhouse vegetables, which have been gaining importance around the world in recent years [39]. The issue of energy consumption in this type of production is of key importance. According to research, heating and lighting costs account for 29% of total production costs [40]. A similar situation occurs in the production of fruit, especially apples. The energy demand is extremely high not only in the production process but also in the storage process. Storing 1 ton of apples requires 15,726 MJ of energy [41], which for a 600 t cold store translates into a cost of USD 19,181 [42]. In Poland, at the turn of September and October, numerous publications appeared on industry portals pointing to the strongly increasing costs of storing apples. These costs can increase up to 5 times [43,44,45]. Freezing fruit and vegetables is also extremely energy intensive. In the US, it is responsible for 10% of total energy consumption in the food industry [46] and 4% of global energy consumption [47]. The cost of freezing (without storage) is up to 10% of the product price. The production of apple concentrate is similarly energy intensive. One of the basic technological processes is the thickening of the must obtained in the pressing process by using evaporation stations and then cooling. In Poland, the largest producers of concentrate use natural gas as the main energy carrier [48].

4. Future Directions

The literature review presented above allows for the formulation of the following conclusions regarding the state of scientific research:

• The sensitivity of farms to the increase in the prices of energy carriers is widely described in the literature on the subject. The first impulse to take up this topic was the fuel crisis of the 1970s. However, this issue requires some updating, related for example to the functioning of the EU ETS and the increase in allowance prices.
• Turmoil in the energy market may lead to serious problems in food production and, consequently, to an imbalance in food security in EU countries. The answer to these threats may be the energy self-sufficiency of farms. Therefore, research is needed on the possibilities of building such a system of energy self-sufficiency of farms that would be able to produce food in the face of global shortages of energy from fossil sources.
• The increase in the prices of energy carriers causes an abrupt increase in the prices of some products (vegetables, greenhouse flowers, apple concentrate). The following questions arise: How long will these products have buyers? When will these types of products become unavailable to the consumer because of the price? On the other hand, the producers of fertilizers stop their production due to the increase in the prices of energy carriers. A key question arises: What are the maximum prices for these fertilizers that are acceptable to farmers to enable them to produce profitably?
• It is necessary to find an answer to the following question: how can farms and the entire agribusiness sector adapt to the physical shortages of means of production and what will be the consequences for the volume of food production and food security in the EU?
• Identification of key non-obvious points (tipping points and triggers) is crucial, the violation of which will result in an avalanche of serious problems for the entire agribusiness sector. As the examples given show, these points can appear practically without warning, which will prevent or allow little time for reactions.

5. Conclusions

The history of the development of civilization is largely the history of using more and more efficient energy sources. This is also seen in agriculture. Without access to cheap and reliable sources of energy, agriculture will not be able to provide enough food for the growing world population. As recent months have shown, all kinds of turmoil in the energy markets are also translating into food markets. Some of these relationships have been thoroughly investigated and described in the literature. On the other hand, this complex system of dependencies includes new variables, such as the functioning of the EU ETS or the increasing importance of biofuels. There are also elements whose significance we are only discovering in the course of these upheavals. Therefore, it seems that in the coming months the attention of researchers should focus on the problems presented in the study, as their significance will grow with each month of the difficult winter of 2022/2023 for the EU countries and parts of the world regarding stocks of energy carriers.

As shown in the research, the key problem of fossil fuel shortages and uncontrolled increases in their prices will be, for example, the risk of ceasing the production of fertilizers. This will reduce the volume of agricultural production and lead to higher food prices, but also cause shortages in supplying other industries with by-products generated during fertilizer production. This problem requires further research to identify all its aspects, as well as practical activities. They should take place at three levels: the EU as a whole, the Member States, and the individual companies involved in the production of fertilizers. As the threat is serious, business continuity management procedures should be developed, which constitute an irreplaceable link in the supply chain of intermediates to other strategic sectors of the economy. An early warning system against such risks should be established, as well as scenarios developed to maintain the continuity of businesses dependent on fertilizer producers. Effective implementation of this requires legal regulation at the national level and for the EU as a whole. The observed phenomenon gives rise to the assumption that similar relationships occur in other sectors of the economy and should be identified.

It can be argued that for the EU to achieve the goals set out in the Green Deal strategy and the farm-to-fork strategy, it is necessary to adopt new technologies, improve energy efficiency, and further develop and adopt non-fossil energy sources for agriculture. It seems that the dynamics of negative changes in the field of energy (war and climate change) force a significant acceleration of research on innovative solutions (background technology) in the field of energy sources and the development of a coherent support system through financial instruments related to sustainable development that will be directly linked to environmental, social, and governance criteria, helping to promote renewable energy and supporting farms with the energy transition.