Market Extra: Fertilizer prices soaring as natural-gas rally adds to ‘perfect storm’

Fertilizer prices were already running red hot this year before a European energy crisis fanned the flames, potentially adding to a pinch on farmers in the U.S. and around the world and stoking worries about food inflation.

“It’s almost like a perfect storm of different reasons that probably has a lot of upside in price for different macronutrients,” said Samuel Taylor, Cleveland-based executive director of research at Rabobank, in a phone interview.

Natural gas is a key ingredient in the process used to make nitrogen-based fertilizers used on a range of crops, including corn and wheat. Natural gas accounts for 75% to 90% of operating costs in the production of nitrogen, Taylor noted.

U.K. natural-gas futures

have surged more than 340% so far in 2021, prompting the shutdown of fertilizer factories in the country and elsewhere earlier this year. Henry Hub natural gas futures
the U.S. benchmark, ended Tuesday at a nearly 13-year high. But gas futures pulled back this week after Russian President Vladimir Putin said the country would honor its commitments and could end up exporting record amounts of the fuel, but prices remain historically elevated.

See: Natural gas prices on the rise again in Europe, following brief respite from pledge of Russian help

Nitrogen prices have been correlated, with a lag, to natural gas prices, Taylor said, in a phone interview. That means any run-up in natural-gas prices in the North American market would be poised to add to rising nitrogen prices.

Nitrogen fertilizers are a crucial input for corn and wheat.

Front-month urea futures for delivery at the U.S. Gulf of Mexico traded at $680 a ton on Thursday, up 168.2% from its Dec. 31 level of $253.50 and more than triple its level from 12 months ago, according to Dow Jones Market Data. Anhydrous ammonia prices in the U.S. Corn Belt have also soared, as producers prepare to make fall applications.

Other fertilizers have also seen a sharp rise in prices for a variety of reasons.

Diammonium phosphate, or DAP, futures traded at $682.50 a ton, up 74.3% year-to-date and 91.2% over the last 12 months.

Bloomberg’s Green Markets Weekly North America Fertilizer Price Index stood at 923.08 on Oct. 1, its highest reading since an all-time high just shy of 930 in August 2008. The index uses benchmark prices of U.S. Gulf Coast urea, U.S. Corn Belt potash and NOLA barge DAP. The index is value weighted based on the annual global demand of each nutrient.

But there’s more to the jump in fertilizer prices, which bottomed out in the summer of 2020 after a multiyear decline, than natural gas.

Josh Linville, director of fertilizer at Stone X, pegs the start of the turnaround to the derecho, a devastating line of storms likened to an “inland hurricane” that brought devastating high winds across Iowa and other parts of the Corn Belt in a 14-hour pounding on Aug. 10, 2020.

The event seemed to spark a turnaround for what had been a long-running slide for grain markets. As prices improved, expectations for fertilizer sales rose, as prices began to turn around, he said, in an interview.

In 2021, a number of supply-related factors have helped fuel the run-up. These range from bad weather, with Hurricane Ida in late August interfering with shipments and shutting down ammonia plants near the U.S. Gulf Coast.

Sanctions on Belarus could curtail the country’s exports of potash, a key ingredient in a fertilizers used on crop acres, analysts said. Meanwhile, some of China’s largest fertilizer producers in July moved to halt exports of phosphate, news reports said, in a bid to ensure ample domestic supplies amid rising prices.

The supply-driven nature of the rally is concerning, Linville said, drawing a distinction to the more demand-driven price rise that drove price increases in 2008.

The analyst said he’s now wary of predicting how high prices could go.

“This is less about fertilizer and this is more about global macro energy prices, if you will,” Linville said.

A sharp run-up in fertilizer prices will be a source of pain for farmers, but producers and consumers should keep the situation in perspective, said David Widmar, an agricultural economist and co-founder of Agricultural Economic Insights, a research firm.

Based on data tracked by the Agriculture Department, corn fertilizer costs in Illinois now stand at around $165 an acre versus around $140 this past spring and around $85 to 90 a year ago, Widmar estimated That’s a big increase, but the profit outlook still looks strong.

In particular, Widmar pushed back against speculation that rising nitrogen prices would lead farmers next spring to scale back on corn planting in favor of soybeans. Soybeans and other legumes form a symbiotic relationship with nitrogen-fixing bacteria, allowing them to meet much of their nitrogen needs by converting atmospheric nitrogen into ammonia.

So while soybeans do need less nitrogen fertilizer than corn, they require roughly the same phosphorous and potassium, Widmar said. “There really isn’t a short-run strategy that gets you out of that phosphorous and potassium conundrum,” he said.

The bottom line is that based on price expectations, corn still looks like a much more profitable bet for producers, said Widmar, who expects to see an increase in planted corn acres in 2022 despite rising nitrogen costs.

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