The Latest on the Rising Fertilizer Market
Back in June I provided some specific context on what factors were driving the increased prices of fertilizer being seen in our industry. Now it’s November and we’re still seeing prices remain high and steadily climbing. So, what’s the latest on the fertilizer market?
Let’s first dive into how the current market compares to last year to get some historical framework on just how different the world of commodity raw materials really is. We’ll stick to the big three…nitrogen (urea), potassium (DAP/MAP) and phosphorus (MOP/SOP). Each of these raw materials is bought and sold as an FOB, ton price and is reported in weekly intervals. There are multiple ports in the US that import these raw materials, but for simplicity’s sake, I’m going to use the popular ones, realizing that the port of entry does have an impact on the offered price. Keep in mind that by the time you read this, the prices have likely changed.
|
|
Current Week |
Last Week |
Last Year |
|
Urea Nitrogen – Import Prill |
$723 |
$715 |
$263 |
|
Diammonium Phosphate (DAP) |
$672 |
$675 |
$357 |
|
Monoammonium Phosphate (MAP) |
$757 |
$763 |
$383 |
|
Muriate of Potash (MOP) |
$678 |
$668 |
$205 |
|
Sulfate of Potash (SOP) |
$775 |
$750 |
$575 |
These numbers speak for themselves. You don’t need to be a market expert to see that these prices are significantly higher than what they were only a year ago. This trend has been persistent throughout the year and, quite frankly, there’s no indication of relief anytime soon.
But what precisely is driving these elevated prices? Let’s breakdown each component with some updated context.
Urea Nitrogen
Urea nitrogen is still the overwhelming driver of the price you pay for a bag of turf fertilizer. As I mentioned last time, a sizeable part of the urea used in the U.S. are imported other countries and we are largely at the mercy of how much they will export. When the amount of available imports quickly evaporated, it was “supply vs. demand” that played a large part of the first wave of price increases in early 2021. Now there is a much more troublesome reason that the prices are pushing even higher…natural gas prices.
There is a global energy crisis gripping most countries right now. Natural gas prices in Europe have risen over 340% in 2021, with no signs of relenting any time soon. But why? The main reason natural gas prices have jumped is that demand for fuel has been artificially accelerated as economies have recovered from the damage caused by the pandemic.
Here's why that’s important when it comes to urea nitrogen. Urea is a synthetically produced component and natural gas is the key ingredient in the process of making it. Natural gas accounts for 75% to 90% of all operating costs in the production of urea nitrogen. When European natural gas prices started to skyrocket in early 2021, it quickly prompted the shutdown of countless fertilizer factories in several countries that could not justify the rapid manufacturing cost increase, which abruptly initiated a supply shortage of urea. With the anticipated supply levels not being there, the remaining amount of available urea started seeing near-record level pricing.
Unfortunately, the story doesn’t end there; there’s more to this jump in fertilizer prices than just natural gas.
In 2021, a record number of supply-related factors have also helped drive up the prices, including Mother Nature. In August, Hurricane Ida directly interfered with the normal shipments of commodities coming and going from the U.S., while simultaneously shutting down all the ammonia plants near the U.S. Gulf Coast. This significantly weakened the availability of urea nitrogen.
As I mentioned last time, we in the turf industry are at the mercy of the agriculture market, more specifically the corn market.
These sharp increases in urea nitrogen prices will be a source of pain for farmers, but it’s expected not to be large enough to get them to switch over to alternative crops, such as 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, if the farmers did switch, that would, theoretically at least, allow more available urea nitrogen to filter down to us in the turf market.
However, while soybeans require significantly less nitrogen fertilizer than corn, they do require roughly the same amount of phosphorous and potassium as corn requires of nitrogen. With those market prices also seeing the same levels of increase, there’s no logical business strategy that provides farmers any relief from the culmination of all fertilizer components going up in price. It would be a net zero game for them.
With all the nutrient factors being equivalent, it’s safe to say that farmers will not switch from corn to soybeans due to the higher crop value per acre of corn over soybeans. In 2022, corn is projected to be valued at $193 per acre while soybeans are valued at $63 per acre, both well above their 20-year averages. Financially, even with increased fertilizer prices, there is not a sound reason for them to switch.
Which brings right back around to where we are today and most likely where will we be for most of 2022; with less available urea nitrogen at near-record level prices.
MAP/DAP
Phosphate prices have risen significantly throughout 2021, with the average ton price reaching a 10-year high. They are following the same trend as urea nitrogen for many of the same reasons; natural gas prices being the most impactful.
One of the world’s leading suppliers of phosphates, Yara, announced in September that it is curtailing production at multiple European plants due to high natural gas prices that are negatively affecting production margins. By the end of November, Yara will have shut down over 40% of its European phosphate production capacity.
COVID-19 was also a significant factor in the supply shortage and increased prices of today’s market.
The world’s top phosphate producer is China, where the pandemic first broke. As such, China was disproportionately affected by the virus because of large-scale, mandated lockdowns which ultimately led to supply challenges and increased prices early in the year. In July, China completely halted all exports of phosphates in an effort to ensure ample domestic supplies as all fertilizer prices continued to rise.
Other global phosphate producers, like Saudi Arabia, Russia and Morocco tried to increase their production to offset the tight availability, but continued shipment and transport disruptions continued to diminish the available supply here in the U.S. This state of sustained unavailability added to pushing phosphate prices to near-record levels that are expected to remain throughout 2022.
MOP/SOP
Early in the spring, potash was the only nutrient not already being in short supply or had irregular price increases. As the most affordable input for farmers, demand started to rapidly increase. With the sharp rise in domestic agriculture acres over 2020, this unexpected demand drove the potash prices up by early summer.
As previously mentioned in my last update, Mosaic Company is one of the world’s leading producers of potash due to having one of the best ore deposits located in Esterhazy, Canada. In early June, Mosaic was abruptly forced to close their two primary mine shafts (K1 and K2) due to an unexpected acceleration of brine inflows, which is a mix of heavily saturated NaCl and water. These closures directly impacted the availability of MOP which sent the potash market pricing into overdrive. Mosaic is predicting a loss of approximately 1 million tons of potash that will not be produced during this unexpected shutdown.
Mosaic announced the reopening of a mine is Saskatchewan over the course of the next year or two, which would increase global potassium production capacity. However, it will likely do little to help pricing in the short-term but could provide some relief by the end of 2022 or early 2023, once the mine has been completely re-opened.
One more important thing…Freight
A quick side note that is important to be aware of is that all those raw material prices quoted in the previously references chart do not include any freight costs necessary to bring them to a manufacturing/blending plant. That’s not even to mention all the freight charges to ship out the finished fertilizer bags to the distributors and then on to the end users.
Freight costs, like so many other areas, have risen substantially over the past couple years and now play a much heavier factor into the costs of producing turf fertilizer. These costs have risen due to two main factors: an overall driver shortage and a shift in the supply and demand model.
It's a simple fact that there are less truck drivers today than there were 5 years ago. The trucking industry is short approximately 80,000 drivers. That’s a 30% increase from before the pandemic hit, when the industry already faced a labor shortage of 61,500 drivers. When COVID-19 hit, there was a sharp uptick in drivers retiring. Due to current driver training regulations, mostly a Department of Transportation age requirement of 21, the number of qualified replacement drivers simply are not there. Those drivers who continued to drive saw an immediate wage rate increase as companies began to fight in recruiting experienced drivers. Currently the average wage of driver is 75% higher than it was pre-COVID.
Keep in mind that when the pandemic hit, consumer demand for practically everything increased exponentially thanks to the ease of online shopping which immediately prompted a massive surge for the demand of more truck drivers to transport goods. This comes at a time when U.S. ports are severely backlogged primarily due to the lack of trucks and drivers available to pick up the cargo; all of which has caused a supply chain slowdown. President Biden directed the Ports of Los Angeles and Long Beach to move to 24/7 operations. However, these ports can’t work round the clock because the importers don’t have enough drivers to move their cargo at all hours.
In the simplest terms, the supply and demand quotient has shifted well in favor of the consumer world. This situation increased the freight rates for those drivers who are willing to continue to haul raw material components and finished products.
Outlook
With all the gloom and doom that’s portrayed here; the takeaway message is that the price of fertilizer is not going down anytime soon. Once the market self corrects, I’m confident that prices will recede…to a point. I would not, however, expect it return to pre-pandemic levels. Everything costs more now. That same dollar you spent last year won’t go as far this year. Unfortunately, the turf doesn’t behave any differently when fertilizer prices rise.