Global Fertilizer Constraints Poised to Affect Farmer Input Costs Well into the Foreseeable Future
As farmers well know, their operations have been weighed down by the effects of inflation over the past year. This negative impact is especially true of fertilizer costs, many of which have more than doubled to all-time highs since the beginning of 2021. Now, as the United States faces a potential and looming global recession, farmers are seeking clarity on the direction fertilizer costs may trend. Export concerns from Ukraine, uncertainty in South American application, and Chinese export bans all factor into current fertilizer prices, and potentially provide insight into where prices might potentially go and how farmers should plan.
The Russian Incursion Continues to Drive Prices Upward
The Russian invasion of Ukraine in late February 2022 triggered United States and European Union sanctions against Russia and resulting high energy costs globally. Interestingly, sanctions did not include restrictions on potash and other fertilizer inputs, all of which are leading exports from Russia. Nonetheless, fertilizer costs skyrocketed to record highs on top of already inflated costs through 2021 (see Figure 1 below / source: University of Illinois farmdocDaily, Weekly Farm Economics, July 19, 2022).
An obvious reason for the price increase was the drastic decline in exports from the destruction of the Black Sea export infrastructure by both Russia and Ukraine. However, U.S. Bureau of Economic and Business Affairs Assistant Secretary Ramin Toloui believes it could also be from Russian policies and their “over-compliance” with sanctions: “Nothing is stopping Russia from exporting its grain or fertilizer except [their] own policies and actions.” (Reuters) He also touched on concerns about “over-compliance” with sanctions due to the wide range of restrictions imposed by the United States.
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To help alleviate the pain of historically high fertilizer prices, the United States is now encouraging other countries to actively seek out Russian exports, hoping to increase global supply to meet the ever-growing demand. Meetings have taken place between Russia, Ukraine, Turkey, and the United Nations to open an export corridor. The efficacy of these meetings is yet to be determined.
Unfortunately, as long as this war continues, the upward pressure for fertilizer prices remains high (especially potash and fuels). Absent a full re-opening of the Russian export market for fertilizers, prices are unlikely to soften to any significant degree with a marginal increase to Russian export supply. While an increase in exports could potentially lower prices, somewhat, remember that prices were already increasing before the war. All this adds up to a persisting input problem for farmers across the world.
South American Demand Is Sensitive to Supply and Price
South American agricultural producers import the vast majority of their fertilizer, which has made the war between Russia and Ukraine particularly burdensome for them from a production perspective. The burning question last spring was how and where they were going to get fertilizer. Those concerns have eased as increased North American fertilizer imports have led to stockpiles of fertilizer in South American warehouses. This, in turn, has led to the next question: how and when can South American producers afford fertilizer?
While fertilizer supplies are plentiful, the combined effect of the strengthening of the USD and the effects of global restrictions has made fertilizer costs too expensive for South American farmers. If prices do not decline to affordable levels, much of South America could potentially skip applications of synthetic nutrients, leading to poor crop yields and increased food inflation. As a result, there could be a large increase in demand for U.S. corn and soy products, effectively driving up corn, soybean, soymeal, and soybean oil prices.
New government policies are also having effects on supplies and prices. In Brazil, for instance, the government is turning to precision fertilizer application methods. They are employing drones and laser technology to accurately analyze where farmers should apply fertilizer, hoping to promote proper application and reduce waste. In Argentina, the government has implemented new rules to finance imports through September. This is intended to protect the country’s dollar reserves, but it may restrict fertilizer supplies and, in turn, reduce farmers’ willingness to plant.
At this point, it will be important to watch South American fertilizer prices and crop estimates to understand where each is trending.
China’s Control of their Fertilizer Market Strongly Influences Global Price
China is the world’s number one exporter of phosphate rock with almost 25% of total world exports. They are also a top exporter of nitrogen (including urea and anhydrous ammonia), sharing 13% of the world total. Clearly, Chinese markets control a substantial portion of global fertilizer supply, which explains the oversized impact of the fertilizer export ban China implemented in the summer of 2021.
At the end of 2020 and into 2021, the world saw the beginning of a massive uptrend in fertilizer prices. This trend can be viewed as a result of strong demand and higher energy costs. As global and domestic prices continued to grow, the Chinese government in July of 2021 announced that all major Chinese fertilizer companies were to stop exporting their products, thus securing domestic fertilizer supply and allowing prices to be controlled. In October of the same year, they instituted harsher inspections to further crackdown on exports.
The results of the export restrictions have been positive for Chinese fertilizer purchasers, who have enjoyed stagnant or even declining prices. For the rest of the world, fertilizer prices soared to historic highs with the war in Ukraine and reductions in global supply. With no clear end to restrictions in sight, some analysts believe they could be extended into summer of 2023. This could have serious implications on foreign markets due to China’s role as a major global exporter.
With little done so far to ease global food and fertilizer supply concerns, it seems uncertain as to when China would end their ban, despite the beliefs of some analysts. If it continues to be extended, countries like the United States and Canada could see large increases in demand pressure from foreign markets. Due to China’s position in the phosphate and nitrogen markets, this means farmers who use fertilizers like DAP, MAP, and anhydrous ammonia may continue to experience high input prices.
Keep an Eye on Changing Conditions and Seasonality
On balance, it seems unlikely that fertilizer prices will trend downward anytime soon, based on events in Ukraine, South America, and China. Expect fertilizer to continue to be tight and for prices to remain high accordingly. On a bright note, U.S. farmers seem well-positioned to be able to make up for increased fertilizer costs due to potential global under-performance of supply shortfalls of agricultural products such as soybeans, corn, and wheat.
Bear in mind that fertilizer prices, like many other farm inputs and production, are still likely to be affected by seasonality. Take another look a Figure 1, and note the downward bump in prices closing into September of 2022. Global market conditions as discussed indicate that this decrease in price may reflect typical seasonality rather than a change in trend. Remember, every decrease in price does not necessarily indicate a change in trend, which is important to keep in mind and to assess as you make important business decisions for your operation, including when to make purchase decisions for fertilizer. In all, it will be important to be attentive to the markets in the coming months to assess where fertilizer prices are, and where they will be trending, as to not get caught with unwanted prices.
SEASONAL PRICE MOVES OR EXTREME MARKET CONDITIONS ARE NOT MEANT TO IMPLY THAT SUCH MOVES OR CONDITIONS ARE COMMON OCCURRENCES OR LIKELY TO OCCUR. FUTURES PRICES HAVE ALREADY FACTORED IN THE SEASONAL ASPECTS OF SUPPLY AND DEMAND.
Turn to Total Farm Marketing
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If you have questions on how we can help, reach out to one of our consultants at 800.334.9779 or visit us at TotalFarmMarketing.com.
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