Mr. Fabien Santini:

It is a pleasure to be with the committee this afternoon. I am the deputy head of unit for the governance of agrifood markets in DG AGRI. We are dealing with the agriculture and farmer side on these issues. We will try to contribute to the members' questioning on these issues. After my opening statement, I will be happy to answer questions.

The issues of fertiliser prices and fertiliser availability are of serious concern to the European Commission. The Commissioner for Agriculture, Mr. Wojciechowski, repeated several times, including at the last sessions of the Council of Agriculture Ministers, most recently last Monday, that the issue arises because of the potential impact on farmers and the agrifood supply chain. The cost and supply of chemical fertilisers are directly impacted by the situation of energy markets. The production of chemical fertilisers is an energy-intensive activity. There is a significant correlation between the circumstances of energy markets and the circumstances pertaining to fertilisers. Many citizens and sectors of our economy, not only in agriculture, have been feeling the impacts of rising energy prices in recent months. Agricultural markets are not escaping. The recovery of the EU, US, Chinese and other economies, which is good news after the pandemic and the difficult times we have gone through, means higher demand for energy and other inputs.

Some of the energy markets have seen price increases that remain reasonable. The oil price is back to $80 or $85 per barrel on the world market, a level seen before the pandemic. If it was not at that level, it was close to it. The prices of other commodities in the energy market, such as gas, have suffered a much more spectacular increase. Since last year, there has been a fourfold increase, and a sixfold increase at certain moments. We have seen a linked increase in the electricity price.

Energy markets in general are of concern in the EU economy as a whole and were on the agenda of Heads of States at the two last European Council meetings, in October and December. Therefore, it has been discussed more widely.

On fertiliser, nitrogen fertiliser prices in particular are strongly influenced by natural gas prices because one of the main feedstocks in the production of nitrogen fertiliser is natural gas. In this regard, it is used as a source of both energy and carbon. Nitrogen fertiliser prices have increased significantly over the past year. According to World Bank statistics, the world price of urea increased by 263% between December 2020 and December 2021, and that of diammonium phosphate increased by 92%. Phosphate and potash fertiliser prices are also under pressure - but less so than nitrogen fertiliser prices since they depend less on natural gas - because they also involve an energy-intensive production process. They also have seen increased demand. Pressure has been exerted by some supply-chain disruptions linked to Covid and geopolitical tensions. Overall, the World Bank’s fertiliser index for December 2021 shows a 165% increase over December 2020. This means the price is two and a half times higher than one year previously.

Regarding how fertiliser prices affect farm accounts, we have the data from the Farm Accountancy Data Network, which gives accountancy information for 80,000 farms in Europe. We can see that the cost of fertiliser represents a reasonably modest share of the cost of production of EU farms, amounting to an average of 6% to 7%. The average is hiding different situations. For example, specialist cereal growers use much more fertiliser, on average. For field-crop specialist farms - that is the name of the category of the Farm Accountancy Data Network - the share of the cost of fertiliser in the overall cost of production reaches 13%. The data for Ireland show that the share of fertiliser in the cost of production incurred by Irish farmers, at 9%, is higher than the EU average, which is 6% to 7%. It is 18% for field-crop specialist farms in Ireland by comparison with 13% in the rest of the EU. Even with dairy, beef and sheep specialist farms - grazing livestock farms - there is a differential. The cost of fertiliser is 9% of the cost of production on these farms, while the EU average is only 3.5%.

In a market economy, price signals, for both inputs and outputs, comprise information necessary to allow farmers to make better production and investment decisions. They adjust decisions based on the price relationship. However, when the volatility is sudden and strong, it is more difficult to adjust and there is different timing for the decisions.

The volatility is sudden and strong. It is more difficult to adjust and there is different timing for the decisions. The Common Agricultural Policy in general addresses these difficulties by supporting EU farmers through direct payments, which have a strong income stabilisation impact when compared with other regions of the world that do not benefit from this kind of support. A variety of risk management tools, insurance, income stabilisation tools and mutual funds are available in the rural development programmes. Farmers also can protect themselves against the volatility of both input price and output price through hedging tools, for example forward contracts. They can do that directly and very often they do so through producer organisations or co-operatives, which organise these hedging tools. It is a protection against the volatility in markets and provides some stability. We should encourage EU farmers to use these tools to smooth this volatility.

Farmers are not bound to fully bear the full volatility of prices themselves. Sooner or later - the same is true for reduced income - extra costs will be passed through the food supply chain to consumers, through price transmission mechanisms. The European Commission pays particular attention to having a well-functioning food supply chain to ensure this transmission is happening. All the burden lies on one stage in the food supply chain, very often the farm stage, being characterised by more atomisation of the producer and less concentration on other stages of the chain.

We did a lot. We paid particular attention and did not spare our efforts to improve the functioning of the food chain. I will give some examples. Many elements related to the option for farmers to co-operate by derogation from traditional competition rules. For example, rules on contractualisation were improved. We adopted the directive on unfair trading practices to prevent stronger actors in the chain from abusing their dominant position. We also favour market transparency in order that everybody has the same level of information and can make their decisions based on the same amount of information. All these elements aim to reinforce the position of farmers in a food supply chain where other stages, in particular retail and processing, are often more concentrated.

Clearly, the recent sharp increase in price of fertilisers, as shown by the figures I quoted earlier and which the Chairman also mentioned in his opening statement, go beyond what are considered normal fluctuations. For the moment, very strong increases in fertiliser prices have been offset by the very good level of agricultural prices. We have several indices for agricultural prices. The main indices show that agricultural prices have increased by 10% last year and by close to 30% in the last two years. That needs to be put in the context of the increase in energy and fertiliser prices, and other costs. Farmers can still absorb at least part of this cost.

As the Chairman mentioned in his preliminary words, there have been also some concerns over the supply of fertilisers for the next applications from next spring. The expectation so far is that sufficient fertiliser supplies will be available for the forthcoming spring operations and that there will also be a sufficient incentive for our farmers to maintain production levels.

The economic optimum for the application rate for fertilisers is a function of the relative prices of the fertilisers and the output price expected from the crops or other agricultural products that are being produced, because Ireland has a grass-based system for which the animal product prices are also important.

As we saw, both these indices have increased in the last year but fertiliser prices increased more than the price of crops. According to all the estimates we have seen, we expect that the economic optimum for farmers would be to apply slightly less fertiliser than usual in the coming year, with a possible modest yield impact. In parallel, advisory services are here to help farmers to optimise their application rate of fertiliser in view of this evolution of prices. Farmers may also decide to adjust their rotations and choose crops with less need for chemical fertilisers. Given these elements, we do not expect this situation to represent a risk to the overall EU food supply and food security this year.

We will need to remain vigilant on this and follow economic projections from for example, the European Central Bank. It remains of the view that the factors that have led to supply chain bottlenecks should ease this year and that we will return to more moderate price trends.

The Commission keeps a close eye on the markets and stands ready to intervene in case it is necessary to do so. As an example of what has already been done, President Von der Leyen discussed the current situation of energy markets with the Heads of Government at the European Council. The Commission presented a toolbox of measures to mitigate the current spike in energy and fertiliser prices at the end of last year.

The reformed CAP will continue to support our farmers through direct payments, risk management tools and rural development. If necessary, as was in the case in the past when the market was disturbed, exceptional measures can be triggered. These were instrumental to the success of our agrifood sector during the Covid pandemic, ensuring that a food crisis was not added to the health crisis during such difficult times.

Furthermore, the EU state aid rules regime provides that member states may support farmers in this exceptional situation. EU member states may quickly act by granting what we call de minimisaid. Among others, the state aid temporary framework, adopted during the Covid pandemic, may provide options to the member states. It has just been extended until the end of June 2022. The overall state aid amount per undertaking active in the primary production of agricultural products has recently been increased by €65,000, that is, from €225,000 up to €290,000. Where it can be shown that the market is already under pressure due to the Covid situation, this should allow member states to address this difficult situation for our farmers in the short term. Some member states have already used this opportunity.

It is important to take a longer-term perspective of this situation. This episode demonstrates how the EU agrifood sector is especially vulnerable due to its heavy dependence on fertilisers, and therefore on fossil fuels. We must tackle this vulnerability by reducing our dependence on key imports, especially from unstable sources or unreliable third countries. In the context of the EU industry strategy in general, the Commission continues to work with member states on strengthening what we call our open strategic autonomy by reducing our dependence on certain imports, as well as identifying such imports. Regarding fertiliser, phosphate rock has been listed in the EU's list of critical raw materials since last year.

Specifically concerning food security, in addition to this general reflection on how to ensure our open strategic autonomy, we established a new European food security crisis mechanism expert group in December.

In the context of that expert group and the mechanism, the Commission will map vulnerabilities and dependencies specifically linked to the food chain and will discuss them and ways to mitigate them with the member states and all stakeholders of the food supply chain in order to be better prepared for any event that would put food security at risk. The first meeting of this expert group, which is scheduled in the coming weeks, will look at the issue of high input costs, including fertilisers. This has already been announced by the Commission to the member states.

This issue is not only a question of input prices and food security. It is also important for our overall wider Green Deal objectives, where we are committed, in fact, to reducing nutrient losses. By 2030, we have the target to reduce by 20% the use of fertilisers for the purpose of the Green Deal. In fact, we have with this episode a bigger incentive to use less gas and mineral-based fertilisers and to use them more efficiently. We must, therefore, act decisively under the new CAP to accelerate this transition to a more sustainable agriculture including for fertilisation practices. I will list some examples of actions: greater use of precision farming for better optimisation; the use of more bio-based nutrients and organic fertilisers; the use of more adaptive crop rotation practices that are less dependent on mineral fertilisation, for example, with a higher share of pulses and nitrogen fixing plants; and as I said earlier, we must encourage farmers to use more risk management tools that are available on the market and through the CAP supports.

I would conclude that the current situation provides an excellent reason to use the opportunities of the reformed CAP, at a time when member states are presenting their CAP strategic plans, to improve the sustainability of food production through reduced use and greater efficiency in relation to fertilisers.