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A fertilizer shortage has contributed to growing concerns about the impact of the Ukraine war on the price and shortages of certain staple foods.
According to Morgan Stanley, Russia and Belarus together supplied about 40% of global potash exports. Russia’s exports have been hit by sanctions. Additionally, a major Belarusian producer declared force majeure in February – a declaration that it could not maintain its contracts due to forces beyond its control.
Russia also exported 11% of the world’s urea and 48% of ammonium nitrate. According to Morgan Stanley, Russia and Ukraine together export 28% of fertilizers made from nitrogen and phosphorus and potassium.
Interruptions in these supplies due to sanctions and war have caused fertilizer prices to skyrocket. High grain prices increase even more.
“It’s a huge problem,” CF Industries CEO Tony Will said in a recent CNBC appearance. He said global fertilizer supplies are very tight. CF produces and sells fertilizers.
“It’s a confluence of factors, unprecedented demand coupled with a huge drop in supply availability, only exacerbated by the war in Ukraine and exports from Russia and Ukraine,” Will added.
A contribution to higher costs and bottlenecks
“All of this is a double whammy, if not a triple whammy,” said Bart Melek, global head of commodity strategy at TD Securities. “We have geopolitical risk, higher input costs, and essentially congestion.”
“Agriculture will absolutely be affected. In Canada’s case, it’s good for Saskatchewan, the world’s largest potash producer, but farmers will be hurt because they will be paying a lot more per hectare,” Melek said. “They’re going to get lower returns simply because they’re saving, especially in emerging markets.”
Grain shortages will drive up the cost of staple foods and other commodities. “This will lead to higher input costs for the production of grain, wheat and corn. Input costs are higher now because you will have scarcity, which will also drive up the price,” Melek said. Meanwhile, prices for cows, oxen and pork bellies have also risen significantly, he added.
Some fertilizers have more than doubled in price. For example, Melek said potash traded in Vancouver was around $210 a tonne in early 2021 and is now at $565. He added that urea for early 2021 delivery to the Middle East was trading at $268 a ton on the Chicago Board of Trade and was valued at $887.50 on Tuesday.
Will said CF Industries is running its facilities 24/7, skipping some maintenance and trying to expedite shipments to areas in need. “There is no need to produce new bins. It’s just about getting them to market as quickly as possible,” he said.
Just as the price of fertilizers has skyrocketed, agricultural commodity prices have also skyrocketed amid fears of shortages.
“We’re absolutely facing a problem of catastrophic proportions here,” Will said. “The problem is not only the lack of availability and affordability of nutrients and inputs, but Russia and Ukraine have historically exported about 30% of the world trade in wheat and 20% of the world trade in corn.” He added that stocks of these commodities exist , which are not coming to market because the Black Sea is closed.
Rising wheat, corn and soybean prices
July wheat futures were slightly down on Wednesday. They rose about 4% on Tuesday on worries about Ukraine, but also on worse than expected harvest conditions in the US. Corn futures prices are up nearly 30% year-to-date and gradually declined Wednesday on the Chicago Board of Trade. Soybean futures were also slightly lower.
Morgan Stanley expects grain prices to remain above prior-year levels through 2023.
“Before the Ukraine war, the dry weather was in [Latin America] have pushed inventories to levels that would already keep grain prices high,” Morgan Stanley analysts wrote in a report.
“The war adds uncertainties to Ukraine’s corn/wheat supply and, more importantly, fertilizer use and global yields,” they said. “For this reason, our base price scenario implies a 2-3 percent reduction in yields in higher cost regions, at risk of major disruption, depending on fertilizer availability and weather.”
Morgan Stanley analysts said they expect higher prices in 2022 and 2023, but after that they expect inventories should normalize with more supply from Latin America. They also expect prices to align more closely with production costs, falling 15% to 20% below longer-dated soybean and corn contracts.
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Melek said corn is up 57% in 2021 and it could be volatile this year, up 25% on annual average. Livestock prices rose 19% last year and could rise another 15% in 2022. Wheat rose 27% in 2021 and could gain another 22% this year, he said.
Melek said the high prices are being driven by tight supplies and shortages.
“We’re talking about an erosion of food security on a scale that we haven’t seen in a long time, and I think it’s going to affect people in the lower income distribution in North America,” he added. Melek said farmers would likely consider moving into less fertilizer-intensive corps and would economize on the amount of nutrients they use.
“Consumers will also make choices,” he said.
Fertilizer production relies on natural gas, and that’s made a difference for U.S. producers. According to Morgan Stanley, the largest buyers of the three most important types of fertilizer are Brazil, India, the USA and China.
“Being a North American producer is extremely important to us. We’re paying somewhere in the neighborhood of $5 to $6 per million British thermal units [MMBtu] of natural gas,” said Will of CF. “Europe pays $35 to $38 per MMBtu… That’s a huge spread between cheap production and one of the reasons fertilizer prices are the way they are. It’s not just a lack of availability, but the high-end producers are very expensive.”
For some growers, expensive or unavailable fertilizer means plants may not get as much nutrition that year. In turn, yields could be lower.
“In close contact with a number of our customers in Latin America, we will begin exporting on a humanitarian basis just to bring nutrients to a region that is a rich producing area but is also currently starved of nutrients,” he told CF’s Will.