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I'm confused about this UK story of the need for government intervention to "bail out" a CO2 producer:

The UK government has agreed to subsidize a major US fertilizer manufacturer at a cost of several million pounds to taxpayers in order to restart carbon dioxide production vital to Britain's food supply. [...]

CF Industries decided last week to halt operations at its UK fertilizer plants because soaring natural gas prices had made them unprofitable. That announcement sparked warnings of a food supply crisis because its plants also produce about 60% of Britain's food-grade carbon dioxide.

The gas is used to stun animals for slaughter, as well as in packaging to extend the shelf life of fresh, chilled and baked goods, and in the production of carbonated drinks. The British Meat Processors Association warned Friday that the supply shock could cause food shortages within 14 days once current stocks of CO2 gas run out.

If CF was such a critical link/supplier of CO2, why could they not just increase the price of CO2 but shut down the factory instead? Is the CO2 price regulated somehow in the UK?

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    $\begingroup$ I have a strong suspicion that the majority of economic stories about corporations are abstracts of company PR pieces with some added background information that does not challenge the narrative. $\endgroup$
    – Giskard
    Sep 22, 2021 at 13:31
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    $\begingroup$ I don’t know details of this case, but without knowing anything else, I would say that likely the demand for their fertilizer was very elastic and if they would increase price demand would drop so much it would still be unprofitable. Sometimes increase in costs of production can kill the whole market. If cost to produce oranges would increase to 10000 USD per kilo then trying to sell oranges for 10000 USD would not help if demand for oranges at that price is effectively zero $\endgroup$
    – 1muflon1
    Sep 22, 2021 at 13:31
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    $\begingroup$ @1muflon1: fair point, but that's because one can buy some other fruits instead of oranges or even vitamin pills. It's not clear here what the substitute product could have been... presumably some other inert gas, but without a supplier to package it in the quantities needed, it wouldn't be a real substitute... I guess more broadly it could have meant the disappearance of some types of packaging, leading e.g. to shorter expiration dates on products. $\endgroup$ Sep 22, 2021 at 13:37
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    $\begingroup$ @1muflon1 If the demand for the CO2 is elastic then how is this true: "The British Meat Processors Association warned Friday that the supply shock could cause food shortages within 14 days once current stocks of CO2 gas run out." If the demand for the fertilizer is elastic but the demand for CO2 isn't, why do they not charge for the CO2. $\endgroup$
    – Giskard
    Sep 22, 2021 at 13:37
  • $\begingroup$ @Giskard okay but the article said that the CO2 is mostly used to kill animals and in bottled water. So there could be shortage of bottled water which is technically food but if there is close substitute of just plain drinking water that runs from your home, and if you can kill animals with other methods like with electric shocks or substitute plant based diet for meat based diet, you would again have fairly elastic demand for that CO2 even if there might be shortages on some market $\endgroup$
    – 1muflon1
    Sep 22, 2021 at 13:46

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I had exactly the same question, and it appears they now have done so. I’m not quite sure why government needed to be involved in negotiations here.

The cost of CO2 will rise from £200 per ton to £1000 per ton. It’s unclear what percentage of the production cost of meat products is made up of the cost of CO2, so hard to say what the impact will be on overall costs, and therefore overall prices.


Speculation follows:

I expect the U.K. has a fairly flexible consumer market for meat, especially given only pork and chicken are stunned with CO2 - people may be happy to switch at any price rise.

There’s also a very competitive supermarket environment, so possibly very little flex in prices, especially with competition from imported meat. Some supermarkets have price match’s with others / price locks, so might chose to have empty shelves over buying the now more expensive product (given they would be forced to absorb costs).

It’s quite possible meat would then be stacking up + not selling post slaughter. This is obviously bad because slaughtering the animals costs money. It makes more financial sense to cull the animals at the farm + cut your losses if they’re not going to sell.

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  • $\begingroup$ Culling at the farm means that someone has to cull the animal and farmers are not normally qualified to do this and it would be down to vets and then the farmer would have to dispose of the carcass (and paying for the culling and disposal rather than getting paid for the animal to enter the food chain). Initially, I expect we would then have a vet shortage and after the farmer tries to absorb the costs and can't then many animal farmers would go bankrupt. $\endgroup$
    – MT0
    Oct 12, 2021 at 10:42
  • $\begingroup$ I'm guessing it might have had something to do with avoiding such pricing shocks... or a avoiding "Putin to the rescue" headlines, which ultimately happened anyway. bbc.com/news/business-58815665 $\endgroup$ Oct 12, 2021 at 14:15
  • $\begingroup$ Or some kind of sweetheart deal for the Americans: "The BBC understands that the deal with CF Industries has been drafted so that other companies who stop production because of high commodity prices will not be able to ask the government for similar help. Norwegian firm Yara has also cut production at a number of European factories, including one in Hull." bbc.com/news/business-58641394 Special Relationship and all that. $\endgroup$ Oct 12, 2021 at 14:29
  • $\begingroup$ Interestingly CF was that big in the UK because it bought part of Yara's operations there a some 5 years ago yara.com/corporate-releases/… $\endgroup$ Oct 12, 2021 at 14:33
  • $\begingroup$ The UK gov't seems to have pursued a similar strategy in the natural gas market, only talking to the companies deemed "too big to fail" news.sky.com/story/… $\endgroup$ Oct 12, 2021 at 14:42
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I'm not an economist but let me add some chemical engineering background to the issue to explain the "why".

They aren't really in the business as a "CO2 producer".

Food-grade CO2 is a byproduct of the production of hydrogen from natural gas (methane) using steam reforming and water-gas shift reaction. The hydrogen produced this way is then combined with nitrogen from the air to make ammonia, which is a key chemical used to produce fertilizers and other products.

The "CO2 producers" aren't thus doing business to produce CO2 in the first place, they're ammonia producers who also opt to make a little bit of extra money selling their waste CO2.

The main inputs to the whole process are:

  • methane (natural gas)
  • energy (produced by burning natural gas)
  • air and water (cheap)

It's thus obvious that most of the production cost is given by the price of natural gas. However, ammonia is much easier to ship around the world than natural gas, so the ammonia consumers aren't interested in paying a premium to cover the current high gas prices in Europe when they can just ship in ammonia from elsewhere.

The only way one can sustain CO2 production given these circumstances is to turn what you used to consider waste into your primary product. As Tim's answer explains, that entails a five-fold price increase over a few weeks, which will be hard to swallow for most consumers.

It's as if people suddenly lost interest in beef but still needed leather to make shoes. It would likely take some effort to convince farmers to raise cows just for cowhide while dumping the meat.

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