Fertilizer’s wild ride

RISING COMMODITY PRICES

Fertilizer’s wild ride

Fertilizer makes modern-day agriculture possible — it ensures the 8 billion people and several billion more animals we raise for food do not starve to death. And this vital commodity has had quite a wild ride recently, tripling in price over the last two years. Today we take a look at what happened, where we’re at now in terms of availability and affordability, and what this all means for upcoming grains and oilseeds harvests.

HOW DID WE GET HERE

As in so many other markets, the disruption in the fertilizer market is at least partially rooted in the coronavirus pandemic. Laura Cross,

Director of Market Intelligence for the International Fertilizer

Association (IFA) recounts how, given the deep levels of uncertainty about the future caused by the 2020 lockdowns, demand for food crops went up. “We saw two things happening: on the one hand, we saw governments putting a really strong emphasis on food security...

And then secondly, we saw a period of price inflation — food prices, crop prices. Now what that does for farmers is that incentivises growing more in a given year, and that in turn requires more fertilizers.”

Amid a background of strong demand, 2021 brought the same supply chain disruptions experienced by many industries, compounded by weather events which took some fertilizer capacity offline. “Examples would be the hurricanes in the US — a lot of nitrogen and phosphate capacity in North America is centered in that region. That led to several months of downtime for those producers.”

But the biggest issues of 2021 were those that that outsiders to the fertilizer industry might have failed to understand the importance of. China, a major producer of nitrogen and phosphate fertilizers, implemented export restrictions on fertilizers in the second half of 2021 and extended them through 2022. “When there is the risk of global shortages and when domestic prices are high for farmers, [China] tends to want to keep more product domestically… we’re seeing about 50% of the normal volumes being exported from China compared to [similar time periods

A FEW BASICS without export restrictions].” Next, Belarus, one of the few countries in the world endowed

Fertilizer is divided into three categories: with natural potash deposits, came nitrogen, phosphate, and potassium (potash). under sanctions by the EU and the

The main input for nitrogen fertilizer is US after violations of democratic chemically-synthesised ammonia, and the rights and international norms, manufacturing process generally requires a lot most notably Belarus coercing a of natural gas. commercial flight flying between two EU destinations to land in Minsk

Phosphate fertilizer is made from phosphate to allow the Belarusian regime to rock, which is mined and is only found in naturally-occurring deposits, primarily in northern Africa, although other areas such as arrest two dissidents on board. Both the EU and the US included

China and the US also have some. Sulphuric sanctions specifically concerning acid, produced by petroleum refining, is another the potash industry. major input in its production. As the sanctions situation evolved over time, the threat of them

Potassium fertilizer is made from potash, which caused uncertainty in the market, again is mined. The main chokepoint in its driving demand for these fertilizers production is the fact that potash deposits are upward even before the Belarusian only available in a few areas around the world, including Canada, Russia, and Belarus. supply began to dry up. “You had this uncertainty about what could ©Antony Trivet / Pexels.com be sourced from Belarus, which alone is about 20% of the globally traded market,” recalls Cross. “That had another impact on price, because there were lots of people who were wanting to buy potash before there were potentially supply issues.” Moreover, even while there might have been customers in other parts of the world still willing to buy potash from Belarus, the sanctions had an ability on the physical availability of product. The country is landlocked, and the majority of its production (up Continued on page 12

RISING COMMODITY PRICES

Continued from page 10

to 90% according to the World Bank) was shipped through Lithuania, which stopped Belarusian potash from accessing its port in response to these sanctions.

Amid this already tumultuous background came the whirlwind caused when Russia, the world’s single biggest exporter of fertilizer, invaded Ukraine.

“At the outset of the war in Ukraine, there were concerns that there would potentially be a shortage of all three [types of fertilizer, i.e. nitrogen, phosphate, and potash],” explains Cross. “Because nobody really knew how sanctions would impact the flow of fertilizers, that was the concern, that there would be a shortage.”

Ultimately, it has been established that fertilizer products are not included among the US’s sanctions on Russia, and can be traded without fear of falling foul of the US Treasury Department. “But in the immediate aftermath of the invasion of Ukraine, that really wasn’t clear,” says Cross. Hence the record-high prices this spring, as companies scrambled to secure supply. WHERE WE’RE AT: AN AFFORDABILITY RATHER THAN AN AVAILABILITY ISSUE

According to Cross, the situation today has somewhat eased. When it comes to the nitrogen and phosphate fertilizers, she says, “we’ve moved away from the initial concerns about an actual shortage.” However, in its place are very serious concerns about affordability, something which will be deeply felt by smallholder and subsistence farmers.

Meanwhile, in Cross’s words, “There is very much a shortfall of potash fertilizers in the market. That’s because there’s a very small concentration of producers around the world…there hasn’t been any way to replace the lost potash supply from [countries like Belarus who are effectively out of the market].”

While still quite high in historical terms, by Q4 of 2022, fertilizer prices seemed to be coming down from the eye-watering highs seen in the initial months after the invasion of Ukraine. “They haven’t gone back to the levels that they were at prior to the war in Ukraine. But they’re lower than they were at their peak.”

This can be explained as a result of both supply and demand. “On the supply side, Russia [is] exporting more than was originally expected, for nitrogen and phosphates,” says Cross. Meanwhile, on the demand side, she highlights the “very close relationship between affordability and demand… when prices increase significantly, farmers tend to use less because they only have a certain budget they can apply to crop inputs.” She hesitates to call this demand destruction, pointing out it is more a question of “delayed demand” in some parts of the world, but the effect is that the high prices at some point became self-correcting, as demand has dropped off until fertilizers became more affordable.

World Bank Commodity Price Data World Bank Commodity Price Data This might be 300.00 a heartening nominal US dollars, 2010=100 50.00 100.00 150.00 200.00 250.00 assessment to those in Europe, whose news feeds have been dominated by stories of shutdown after shutdown of fertilizer producers 0.00 2017-Oct2017-Dec2018-Feb2018-Apr2018-Jun2018-Aug2018-Oct2018-Dec2019-Feb2019-Apr2019-Jun2019-Aug2019-Oct2019-Dec2020-Feb2020-Apr2020-Jun2020-Aug2020-Oct2020-Dec2021-Feb2021-Apr2021-Jun2021-Aug2021-Oct2021-Dec2022-Feb2022-Apr2022-Jun2022-Aug2022-Oct who have been pushed into last 5 years by month furlough by the oils and meals grains fertilizers continent’s natural gas crisis. “At the end of October, our estimate of how much European ammonia capacity was shut down was 40%. So it’s actually better than the worst of the situation, which was [around] August, when European gas prices were sky high, at their absolute peak. So, the situation has improved a little bit… but there’s still a lot of risk around the outlook for that, because Europe’s still in a very vulnerable position when it comes to gas prices.” That being said, in a market which is currently dominated by concerns about price rather than physical availability of product, well-resourced European planters are in a comparably better position than their peers in the Global South, and will be able to import enough fertilizers for their needs. “European farmers, while they may not be having the best of times at the moment, are very much better leveraged than farmers in the developing world. And so they’re actually in a stronger position to import product from elsewhere. That tightens the global market further, because you’re pulling product from other parts of the world where it might go otherwise.” IMPACTS ON UPCOMING GRAINS AND OILSEED HARVESTS Given this environment — one which appears to be (thankfully) devoid of shortages of fertilizer, but in which high prices are still discouraging many from using it — the big question for the feed industry is what to expect in terms of impacts on feed ingredients next year. To help answer this big question, the IFA (along with CRU Group) have contributed to Gro Intelligence’s modelling of the yield response which can be expected in light of the reductions in fertilizer applications. Known as the Global Fertilizer Impact Monitor, it focuses specifically on nitrogen fertilizer, which farmers typically have to use every year, rather than potash and phosphate fertilizers, whose application can be slightly more flexible. According to this model, corn, one of the most intensive consumers of nitrogen, sees a 2.3% reduction, while wheat experiences a 2.5% reduction. It is also critical to remember that these impacts will not be evenly divided. “You have developed farms who are in, for the most part, more commercial environments, and they are higher up the yield curve in terms of the nitrogen that they apply. What that means is that if they reduce their applications slightly, you typically don’t get a large yield response. So you may have a number of farmers, especially in the northern hemisphere and in markets like

RISING COMMODITY PRICES

Projected Production Change in Calories Based on IFA Estimates for Global Nitrogen Fertilizer Application Changes

© Courtesy of Gro-Intelligence and International Fertilizer Association. Gro Intelligence is a data and analytics company that is focused on solving real world systems like food security and climate change.

Latin America where, if they reduce their nitrogen application by relatively modest percent, they might actually see very little yield impact… the concern for us is the more fragile markets where fertilizer use is already at a pretty low level, relatively speaking. And that means that you get a bigger yield response from being already further down that yield response curve,” notes Cross.

“And so you think, ‘oh, [a few percentage point drop], that doesn’t really feel so bad’, but then when you look at some parts of the world, you have as much as 10 or 20%, that could really trigger a food crisis in those particular regions.”

The dynamic is different for soybeans, which can fix their own nitrogen and thus don’t require nitrogen fertilizers. On the one hand, Cross shares that she has “heard reports [from Brazil] that farmers are planning to use reduced volumes of phosphates, which is an important ingredient in soybean production. We don’t yet know exactly what the impact of that will be, so it’s almost a case study of what happens if you reduce your application.”

But on the other hand, it could also be possible that any reduction in soybean yield might be more than made up for in an expansion of acreage, as farmers who might have planted corn (which they’d have needed to fertilize with nitrogen) turn to soybeans instead. According to analysts from Feedinfo’s sister publication Stratégie Grains, this dynamic was visible in the US in 2022, where the areas planted by soybean increased by 0.5% while the corn area decreased by 5%, despite the relatively good price of corn versus soybeans at the time; this movement can be explained by the high nitrogen price. However, for the next marketing year, Stratégie Grains forecasts a 3% increase in corn area and a 1% decrease in soybean area in the US.

WHAT TO LOOK FOR IN 2023

©Pixabay / Pexels.com China’s imposition of export restrictions on fertilizer caused its exports to drop to about 50% of previous levels. Going forward, Cross says she has her eyes on three areas.

“The first thing is European gas…we don’t really have an internal view on what could happen there, because there is just so much uncertainty, but it’s an area to watch, whichever direction it moves in.

“The [next] area is the Chinese export restrictions, whether next year the government decides to reduce those restrictions or if they keep them in place. That will have an impact on global availability.

“And the [final] thing that we’re looking out for, very specific to potash: there have been some plans to expand the rail capacity from Belarus through Russia, to export potash from Russia…in the next year that could make a big difference on how much can actually be exported.”

By Shannon Behary, senior editor