Today's Fertilizer Market Is Like a Game of Jenga: Part Three- International Factors

This is the third of a weekly, four-part series from LebanonTurf on the current state and forecast of the turf and ornamental fertilizer market.

Part Three – International Factors

Throughout this series, we’ve briefly mentioned several international factors that have directly influenced the roadmap of how we’ve arrived at today’s fertilizer market situation. We’ll continue to dive a little deeper into each of the major countries that will ultimately affect how and when we’ll likely see a return to something that resembles a “normal” market.

Up until now we’ve analyzed our current fertilizer market condition in specific terms of the cause-and-effect issues; increased demand overstressing available supply, excessive energy costs closing production plants, and geopolitical issues impacting future availability to name a few. It’s important, however, to take a step back and understand the fundamental reason why the fertilizer market is so valuable.

If you did a comprehensive root cause analysis of the underlying value of the fertilizer market, considering all the individual factors of every country throughout the entire world, you would arrive at the simplest explanation…they want to feed their people.

Overpopulation and the Theories of Thomas Malthus and Thanos

The U.N. recently released a report that states on November 15, 2022, the world’s population will hit 8 billion people. In addition to being oddly specific, this milestone marks an underlying concern of ever-increasing population growth.

At the beginning of the 19th century, the world’s population exceeded 1 billion people for the first time in history. Subsequent growth accelerated and, in 1920, the population hit 2 billion people. By 1960, another billion had been added, but this time in just 40 years as opposed to 120. Since that time, we have continued to add 1 billion people to the population at an average time span of every 12 years. Population continues to exponentially increase while the necessary supplies to sustain them have not grown at an equal rate. The overwhelming concern of potentially overpopulating the world is certainly not a new discussion topic; in fact, it’s a really old one.

Thomas Malthus, an 18^th century English economist, published his theory, “Principle of Population”, in which he argued that population will always tend to outrun the growth of production. Based on two mathematical formulas, Malthus observed population growth as exponential and food supply growth as arithmetic. So, when the population was increasing following the pattern: 2, 4, 8, 16, 32, etc. The food supply was growing following the pattern: 1, 2, 3, 4, 5, etc. He calculated the population and the food supply at the time, then found when the two would be equal and when the food supply would not be enough to sustain the population. He concluded that the population will always expand to the limit of food production. Or put more simply, children are born 100 times faster than we grow food enough to feed them. Bottom line, there is never enough food to sustain the existent population.

If this sounds familiar, you probably saw “Avengers: Infinity War” and “Avengers: End Game”, where Thanos, the genocidal warlord from Titan, followed this exact line of thinking. His objective was to bring stability to the universe by wiping out half of all life at every level, as he believed the massive population would inevitably use up the universe’s entire supply of resources, causing it to perish.

Ok, stay with us here. What two things do Mathus and Thanos have in common? One…they believed that overpopulation would ultimately lead to the downfall of mankind through starvation, and two…they were both 100% wrong. Both completely discounted the ability to plan and adapt to different conditions, while assuming that all other factors would stay the same…but they never do.

In Malthus’ case, he grossly underestimated the scope for increasing productivity, especially with respect to food production. He didn’t anticipate the massive substitution of tractors for horses, the comprehensive mechanization of farming, the use of chemical fertilizers and pesticides, and the development of higher yielding crops. Food production has not been growing arithmetically, it has been growing exponentially, or at least as fast as population growth.

The fundamental key to achieving this required level of productivity lies in the ability to increase food production without expanding agricultural land. There are several scientific and technological innovations which have allowed for rapid growth in crop productivity, particularly in the second half of the 20th century. None of these had a more dramatic impact than the ability to produce synthetic nitrogen fertilizer.

In fact, it’s estimated that synthetic nitrogen fertilizer now supports approximately half of the global population. In other words, Fritz Haber and Carl Bosch — the pioneers of this technological breakthrough — are estimated to have enabled the lives of several billion people, who otherwise would have died prematurely or never have been born at all.

With the population of every country continuing to grow, each countries’ government plays a major role in shaping food supply and agricultural policies. Governments may influence what a farmer grows, where a farm is located, how products are transported and processed, how a commodity is traded, and the price the farmer might receive. In countries with low agricultural output, their policies on food and fertilizer imports play a direct role on the available food supply for their people. Where this gets tricky is when governmental involvement and decision are influenced by global issues, trade, economics, politics, and other factors.

As we move into each individual countries’ impact on today’s fertilizer market, just keep in mind what’s at stake for them and their people. It can be far too easy to have tunnel vision and only think about the impact on our T&O market when there’s much more at risk when viewed through a global lens.

The International “Jenga” Players

To get an idea of the major players that have the most impact on the international market, here’s a look at the nitrogen fertilizer numbers with their world rankings.

Country	Production (mt)	Exports (mt)	Imports (mt)	Population
China	34,023,626 (1)	5,520,365 (2)	359,238 (35)	1,425,887,337 (1)
India	13,601,710 (2)	86,331 (53)	4,024,329 (2)	1,417,173,173 (2)
United States	11,217,874 (3)	1,854,442 (7)	2,799,685 (3)	338,329,857 (3)
Russia	10,611,761 (4)	7,902,424 (1)	26,846 (99)	144,713,314 (9)
Indonesia	4,023,276 (5)	533,317 (21)	542,405 (20)	275,501,339 (4)
Canada	3,878,466 (6)	1,496,907 (10)	979,958 (13)	38,454,327 (40)
Egypt	3,486,373 (7)	2,070,589 (6)	4,832 (133)	110,990,103 (14)

It’s certainly not a coincidence that the countries with the largest populations are also the largest producers of nitrogen fertilizer. More importantly, these are the countries that can quickly destabilize the market in a variety of different ways, ranging from production disruptions to limiting exports…where even seemingly small issues can have incredibly large downstream effects.

China

China is the single largest producer of total fertilizer on the planet, accounting for 24.6% of the nitrogen market, 37.7% of the phosphate market, and 13.6% of the potash market. Additionally, they are also a major exporter of each component, representing 11.2% share of nitrogen exports, 25.2% share of phosphate exports, and 10.4% of potash exports. China is the world’s leader in combined tons of N, P, and K. With this level of importance in the global market, it’s critical to pay attention to what they are doing.

One of very first factors that started us down the road we’re currently on was the initial COVID outbreak in January of 2020. The pandemic started in Wuhan, China, which is precisely why they were impacted much more quickly and severely than other countries. The government implemented mandated, large-scale lockdowns which initially triggered supply challenges to their vast amounts of fertilizer exports. With the fertilizer manufacturing plants not producing, it became feared that domestic agriculture needs would not be met. In response, China completely halted all exports. This immediately interrupted the anticipated supply, and in response, prices started to increase. China eventually eased up on these export controls and permitted an allocated number of fertilizer exports to ship out of the country. The initial plan was to end these restrictions at the end of June 2022, but China extended them through the end of the year. If these export limitations continue into 2023, supply shortages will also persist, sustaining elevated prices for all fertilizer components.

The more worrying, far-reaching threat from China isn’t how they’re currently operating, but rather the future fertilizer direction they’re actively pursuing. China’s future fertilizer plan is to completely switch from chemical nutrient fertilizer to organic nutrients fertilizers that are sourced from naturally decomposing materials such as animal manure, compost, and crop residue. Currently, there haven’t been any large-scale successes of switching to completely organic fertilizers, but China wants to be the first. China’s government plans to pave the way to a more environmentally friendly and economically stable fertilizer market. If successful, China has the potential to upend and reshape the entire global fertilizer market. Such a drastic shift from the foremost synthetic fertilizer producer and supplier will undoubtedly cause a massive ripple effect for the rest of the world.

India

India produces a sizeable amount of both nitrogen and phosphate fertilizer, accounting for 9.8% and 12.5% of the markets, respectively. However, due to a lack of natural resources, they can’t produce any potash fertilizer. India is the second-largest consumer of fertilizers globally, with an annual consumption of more than 55 million tons; all of which are applied to India’s farmlands. India’s extensive agricultural demand is critical to supporting their current population of 1.4 billion people, which is expected to take the top spot by surpassing China in 2023. This support is leading the exceedingly high demand for fertilizer products and is why India exports less than 1% of the nitrogen and phosphate that they produce. From a global perspective, India is a very large buyer with substantial purchasing power that directly impacts the supply/demand stability of the fertilizer market.

India has recently taken aggressive actions to secure needed fertilizer imports in the future by making investments and creating joint ventures with multiple fertilizer and mining companies in mineral-rich countries, while also securing long-term deals with international suppliers. These measures are also aimed at hedging against price volatility. Currently these partnerships include firms in Senegal for phosphoric acid and Saudi Arabia for DAP. The country has also signed a three-year agreement with Phosagro, a Russian firm, for 500,000 tons of DAP. Additional key deals have been struck for additional supplies of ammonia and phosphate products. In total, these deals are estimated to ensure 2.5 million tons of annual fertilizer makes its way into India within the next two years.

India’s long-term vision and investments are a new tactical approach to secure needed fertilizer volume and increase agricultural production to meet the food demand of the country's growing population. They are mitigating their risk playing the Jenga fertilizer game by positioning themselves to be first in line for future supply from their foreign partners. This strategy will reduce overall available tons for the rest of the world, which will likely sustain elevated fertilizer prices from a perceived supply shortage for everyone else.

Russia

Russia is the second largest producer of total fertilizer in the world, accounting for 7.7% of the nitrogen market, 10.8% of the phosphate market, and 18.5% of the potash market. Russia is also the world’s leading exporter of fertilizer, representing 23.3% share of nitrogen exports, 10.4% share of phosphate exports, and 21.5% of potash exports. Fertilizer is Russia’s main contribution to the global economy, in addition to natural gas.

Let’s start with the elephant in the room when it comes to discussing Russia, the invasion of Ukraine. The Russian invasion of Ukraine substantially elevated the disruptions in the global fertilizer trade that, given the geopolitical consequences of the conflict, could persist over many years. As we’ve previously stated, once the conflict began Russia opened itself up for economic sanctions. Because Russia is such a major player in the global market, sanctions placed on them will have a ripple effect on the entire fertilizer market. The magnitude of these ripples will depend on how many countries impose sanctions and how aggressive they are.

Russia's fertilizer trade has not been the subject of official U.S. sanctions; however, the U.S. did create a general license for fertilizer imports from Russia, attempting to monitor and limit the overall quantity brought in. The EU developed and introduced a quota system for potash imports from Russia. However, many shipping companies have completely suspended routes to and from Russia, which has caused transportation issues. In response to these increasing problems, Russia has also recommended that all fertilizer exports be halted given logistics bottlenecks. Many experts contend that this is a countermeasure response to the sanctions by threatening to withdraw their willingness to trade fertilizer.

A far more widespread effect of the Ukraine invasion is the continued natural gas crisis. Since fighting broke out, Russia and the European Union have been waging an on-going economic war over energy, one that has heavily impacted the fertilizer market. Following the invasion, the EU imposed huge sanctions against Russia, including blocking ammonia transit routes via Estonia and Latvia in the Baltic Sea. Russia responded by severely restricting the flow of natural gas into Europe, triggering already high-priced natural gas prices to climb even higher. When natural gas prices spiked in the EU and widened the cost differential with the U.S., it no longer became economically viable to run the plants, since natural gas represents 80%-90% of the overall costs to operate an ammonia plant. Throughout Europe, curtailments and plant shutdown started in late 2021, which then continued to early 2022, and more recently occurred in September 2022. If gas prices continue to rise, Europe may have to shut down even more facilities. That naturally puts upward pressure on price and downward pressure on availability.

With the conflict still going on, there’s no way to accurately predict when or how it will end and, more specifically, what specific impact the aftermath will have on the supply chain and pricing of the fertilizer market. It’s fair to say, however, that the sooner it ends, the better off the fertilizer market will be.

The fertilizer market is truly global. Looking at current fertilizer market conditions, there are many variables that are outside the control of a single country. When something, anything, changes in one country, it ultimately affects the prices and/or supply for another. For the most part, there’s very little that any one country can do in the short-term to either increase supply or decrease prices quickly. Fertilizer, like any other produced good, just takes time. Which is precisely why it’s important to know what the global Jenga players are doing.

In the final part of this series, we’ll jump into some of the non-commodity related factors that will continue to shape what the fertilizer market will look like in 2023.