An Update on Fertilizer Volatility

Nov 12, 2021

An explanation from Charles Smith, Senior Agronomy Manager, on why fertilizer prices are so volatile right now:

Unfortunately, there isn’t just one cause for the wild fluctuations in prices, and there won’t be just one solution. I’m going to break-down into three categories what I believe is causing these pricing and supply issues to escalate to today’s levels.

Demand Vacuums

A demand vacuum is created when you go from 15-year lows to 15-year highs. During the time low prices are being created, supplies are rationed to the point that the high-cost producers in the market shut down production. If you are reading this thinking that this was done to get prices to go higher, you would be correct. However, think of it this way: Billions of dollars are being invested into an asset that is making zero return. That asset can either keep in operation, or it can be shut down until the market improves. Producers here in North America and globally did just that – they shut down. However, when things started to turn around in October of 2020, the supply needed to be built back up, which is taking a significant amount of time.  Demand for fertilizer in the Fall of 2020 and Spring of 2021 was significantly better than anyone expected, far outpacing supply, causing the record high prices we see today.

U.S. and Brazilian Farmers Competing for Supply

A lot of you reading this have sat down to listen to your favorite grain commentator explain the battle the U.S. farmer goes through when competing against the Brazilian farmer in China for export beans. However, what is good for the U.S. farmer is often better for the Brazilian farmer. Therefore, when the Brazilian farmer saw bean prices escalating at a rapid pace, they began bidding up global fertilizer supply to increase production. The U.S. market still imports a large amount of fertilizer to the East Coast and U.S. Gulf (New Orleans). Therefore, our number one competitor is Brazil! There were times this Summer where Brazilian buyers were willing to pay $100/ton more for potash, phosphate, and urea. In a globally traded capitalistic market we lose most of the time when we are not willing to be the competitive bid. For a large portion of Q3 2021 we saw vessels destined for the U.S. diverted to Brazil because the prices were so much better. Luckily for the U.S. farmer, a large portion of the fertilizer we consume here in the U.S. is also produced in the U.S. However, the market will always move to match its best alternative, creating the high prices of today.

International Energy Prices

There is currently a major energy crisis in both China and Western Europe. Gas prices in Western Europe set an all time high last week of $35 per metric million BTU. Why is this important? Natural Gas is the main feedstock for making Anhydrous Ammonia, which then makes all other nitrogen products and phosphates. At $30+, natural gas ammonia is priced too high to even produce. No one will be able to afford it for what it is used for, because you are talking about $3,000 ammonia. The energy situation in China is so dire that the government has mandated that all state-owned production facilities refrain from exporting any nitrogen or phosphate products. The government of China owns 80% of all the production in the country, and China is the largest producer of fertilizer products and the largest consumer. They are also one of the largest exporters of fertilizer into the global market. So, without their participation, large buyers are having to rely on non-traditional suppliers. The biggest buyer in the market that now must source products away from China is the Indian government. The Indian government has recently been buying products that are typically sent to Brazil and North America, which is driving our prices higher to match the bids from India.

In summary: So what does all this mean for you, our valued SFG customer? High prices, unpredictable market swings, and stomach-turning volatility. Could it get better between now and spring? It doesn’t look good today. It looks like it’s going to get worse before it gets any better. If grain prices rise, it will get worse. If grain prices go down, it will get better. The two will probably work together. Our recommendations are to lock in at least half your nitrogen and all your P & K for this coming year’s crop, as soon as time allows.

In closing, we have very few chemical prices right now and don’t anticipate having most of them for another month to six weeks. We feel that we will be able to accommodate all our current customer’s needs and get them the needed products when needed for the coming year. Some dealers are having trouble doing even that. We feel like we’re in good shape there.

We received from 1.5" to 3" of rain and even a little snow across our trade territory this week, and this will give us time to get our grain bins in shape and fertilizer application will resume as quickly as time allows. Keep in contact with your local SFG agronomist, and feel free to discus these subjects with me any time.
Charles Smith,
Senior Agronomy Manager