After a blistering start to the year amid strong demand and major supply constraints, fertilizer prices ran out of steam in Q2. However, it was not long before rebounds occurred.
Driven by supply side shocks like gas price-related capacity curtailments in Europe and strict sanctions on Russian fertilizers, prices and volatility have whipsawed during the first half of the year. Participants jostled to cover positions and secure cargoes following the loss of millions of metric tons of Russian fertilizer, with significant disruption experienced in the nitrogen fertilizer space especially. Unlike other products which have found routes to market, ammonia exports from Russia have ceased completely. Around a fifth of the 21-22 million metric tons per year of global seaborne trade has been lost.
The situation has resulted in price pressure and diminished availability of fertilizer for global agricultural producers, who are facing a series of market challenges in 2022.
Slashed Exports and High Grain Prices
With fertilizer supply a matter of food security and economic stability, governments across the world have adopted a more proactive approach to securing physical supplies. China and Turkey introduced export controls, while others imposed price ceilings in signs that government intervention could continue for some time. China’s introduction of port and quality inspection controls in October 2021 effectively slashed urea exports to negligible levels. Chinese exports in the second half of the years 2018 through 2021 ranged from 2.87-3.7 million metric tons
From a demand perspective, high grain prices have, unsurprisingly, improved the affordability of many nutrients. Nitrogen prices have corrected from the highs seen earlier in the year and are now at workable levels in many markets, even those subject to government price controls.
For nitrogen fertilizers – particularly urea – Q3 is typically a period of slower global demand. This is reflected in the graph below which shows urea imports for the major markets in the east and west (nearly two thirds of global demand).
In the west, Europe and the U.S. are past their peak import periods. The Brazilian market usually gets going as Q3 progresses. Restocking could prove to be a more significant feature in the offseason this year given the turbulence of the past twelve months. This is especially the case in Europe where high gas prices have again been threatening operating rates. Financing and pricing will be a major factor in deciding this.
For example, Doug Kirk of Terra Plana Family Farms, which operates 8,500 acres in central Illinois, told OpenMarkets that the war in Ukraine has amplified the variety of risks farmers face, including potential input supply shortages such as fertilizer and chemicals. His concern even before planting the 2022 crop was for inputs in the 2023 crop year.
“I don't like to act like the sky is falling… but in my career, I don't think any of these challenges has been so extreme,” says Kirk, who has been farming for more than 20 years.
In 2020, U.S. Gulf granular urea barges traded in a narrow range of $110ps ton, up to the $280s ps ton. Since the beginning of this year, trading has taken place in a $468ps ton range with Nola values surpassing $900ps ton. Though prices have fallen, volatility remains.
Supply Side Issues Continue
Major supply side issues like the impact of Hurricane Ida on domestic production meant that the U.S. was an active importer in the second half of 2021. That extra appetite for foreign volume coincided with difficult conditions in Europe due to rapidly rising feedstock costs.
Unlike 2021, the U.S. is unlikely to compete for imports for Q3 and Q4 arrival in 2022. In addition, Europe’s position could evolve quickly due to the volatility in gas prices against the backdrop of reduced feedstock supplies from Russia.
Indeed, the U.S. urea market has been at a sufficient discount in recent weeks to enable major export shipments to be committed to Europe for the first time. U.S. producers have committed product via traders while urea previously imported in the U.S. Gulf has also been sold. The latest shipments have primarily been for eastern Europe.
With Russia threatening to turn off the gas taps to Europe completely ahead of autumn and winter, governments and industry leaders across the continent are frantically making contingency plans as uncertainty over capacity costs and plant run rates continues to accelerate.
Against this backdrop, price volatility is set to remain a characteristic of global fertilizer markets. For agricultural producers and other market participants, risk management will be a key factor in controlling costs again in 2023.
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