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April 18, 2022
Hyperventilating over sky-high fertilizer costs? Take a deep breath, because prices may linger in nosebleed country for a while – perhaps a good, long while.
To be sure, nutrient markets retreated the past week or two from record or near-record highs. And swaps on Gulf wholesale contracts point to somewhat lower prices this summer. But even those offers are well above average, and history suggests big cutbacks aren’t likely without a major collapse of financial and other commodity markets.
All it took to break the market the last time fertilizer cost this much was “The Great Recession” of 2008-2009, when the world economic system teetered on the brink. Fertilizer values lost more than half their value in a month, as markets from stocks to soybeans melted down. Central bankers worried that deflation could trigger a true 1930s-style Depression.
Fast-forward to 2022 and the script seems flipped. Russia’s invasion of Ukraine exacerbated supply chain problems caused by the pandemic as the economy recovered from a short, deep recession. Inflation is public enemy No. 1, and rising food costs are a big reason why.
The world Food Price Index published by the Food and Agriculture Organization of the United Nations hit a record for March. Fertilizer followed suit, because the FAO’s food index explains 85% or more of the variance in nitrogen, phosphates and potash.
While the index includes meat, dairy and sugar, the other components, cereals and oils, account for much of the changes in fertilizer. The FAO doesn’t put out forecasts for its index, but futures contracts for 2023 crop delivery indicate prices should stay elevated next year. Based on this relationship, current futures prices translate into only a 10% drop in overall fertilizer costs.
Such a reduction is just what the swaps market for summer wholesale contracts at the Gulf is seeing. Fertilizer prices normally pull back into summer, when northern hemisphere demand slackens, then move higher into the fall application season.
Gulf Urea settled last week around $790 after briefly topping $900 earlier this month for the first time ever. Late summer swaps were around $705 – not exactly a bargain.
DAP was a similar story. The 18-46 product closed at $950 last week after almost hitting four figures for the first time since 2008. Summer contracts were at $875. And spot UAN was only a few bucks off its at $627.50, with summer prices at $550.
Belarus, which was under sanctions even before supporting the war, and Russia produce some 37% of the world’s potash. Russia also produces 11% of the world’s ammonia, much of it shipped through a long pipeline to Ukraine for transport out of the Black Sea. Russia was already under anti-dumping tariffs for its DAP and UAN sales to the U.S.
Canada can make up some of the lost potash production, but compounding anything with nitrogen won’t be easy. Natural gas, the industry’s primary feedstock, is expensive and in short supply in Europe, which depends on Russian energy sources.
High crop prices normally are the cure for high prices, but expanding acreage to overcome questions about Russia and Ukraine grain shipments could be dicey due to high fertilizer costs. Many countries, including India, which heavily subsidizes farmers, face massive bills for their policies just as the threat of recession grows due to the impact of inflation and the cost of the Russia sanctions.
Russia’s economy is cut off from the rest of the world, lowering overall GDP growth and the strong U.S. dollar has some weaker economies around the world facing defaults on debt that soared thanks to COVID. China is also in troubled seas, with strict COVID lockdowns shutting factories and further snarling supply chains. These problems could ultimately send the world into another financial crisis. But true black swans are by nature impossible to predict.
Of course, peace could break out all over. But war as usual will ignore spring observances by the world’s major religions this month, from Ramadan to Passover to Western and Eastern Christian Easter. Sanctions on Russia exempt fertilizer and food, in theory. In practice, everything from financing deals with letters of credit to finding a ship for hire is complicated by traders’ reluctance to do anything for fear of violating the murky policies. And Russia has threatened to cut off fertilizer exports to the West, though specifics on this are lacking.
Remember too that sanctions, once imposed, are hard to lift. Talk to the Castro brothers about that one, 60 years on from the Cuban missile crisis. Fidel’s dead and Raul stepped down from power only last year.
Growers wondering what to do amid all this uncertainty should tread cautiously. Volume and open interest for DAP, urea and UAN contracts cleared at the CME Group remains thin, so talk to brokers familiar with the market. Using the Gulf indexes as a hedge for fertilizer bought far up the supply chain is fraught with basis risk, but is one alternative. Local dealers or brokers also may have access to swaps contracts or other mechanisms to price nutrients – just be sure to read the fine print. Some farmers who couldn’t make fall applications got a rude awakening last time around when contracts they thought would be good until spring expired Dec. 31.
Buying high-priced fertilizer before pricing some of those planned bushels can also be dangerous, if the grain market bull turns suddenly into a bear. Watching new crop 2023 futures for potential shifts in sentiment is a good idea anyway, and could offer clues about other important costs, including cash rents and land prices.
In the meantime, India is expected to be back in the market soon with one of its big tenders for urea. COVID shutdowns in China could keep sellers there on the sidelines again, but exporters from the Middle East could be ready to unload inventories rather than gamble on higher prices. That could cause other manufacturers ready to bargain a bit more than they have had to do recently.
But short-term issues continue to dog the industry. The latest evidence of that came from CF Industries, which last week said it was unable to accept new orders via Union Pacific while existing orders of urea and UAN faced new delays after the railroad curtailed service.
Knorr writes from Chicago, Ill. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
Contributing market analyst, Farm Futures
Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and Commodity Trading Advisor. A journalist with more than 45 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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