The big challenge for 2023 harvest budgets? No surprise – it’s fertilizer, or 36% of variable corn costs, according to the USDA. From October 2020 to October 2021, anhydrous prices nearly doubled and will remain stubbornly high in the near term. According to a June 2022 Iowa State study, fertilizer prices are two to four times higher today than they were in 2020.
It’s easy to point to the Russian-Ukrainian conflict as the source of this pain, but the runaway consolidation that has turned the fertilizer industry into an oligopoly began long before the guns started blazing last February. Half of the UANs produced in the United States come from CF Industries. Mosaic produces about 75% of US phosphorus and was successful last year in getting the Department of Commerce to impose countervailing duties on two of its main competitors, Russia and OCP Morocco. Meanwhile, four companies – CF Industries, Nutrien, Koch and Yara-USA – manufacture and sell 75% of the nitrogen fertilizers in this country.
Industry consolidation began soon after the golden age of ag began to wane about eight years ago. Fertilizer companies have seen crop prices fall and have begun to cut costs; to survive, they merged and grew. It happened before our eyes. The antitrust folks in Washington, DC didn’t weigh in. We are seeing unprecedented concentration not only in fertilizers, but also in soybean processing, beef processing, and pork processing.
“Don’t expect the DOJ (Department of Justice) to come in and break up the fertilizer companies,” says Josh Linville, vice president of fertilizers at StoneX. “There are a lot of other industries they will look at before moving into fertilizer concentration.”
It doesn’t hurt if you can eliminate your competitors. In 2020, DAP (diammonium phosphate) had fallen to $250 a ton before Mosaic called for a countervailing duty on Russia and Morocco. Today, the retail price of DAP is almost triple. But that higher price also reflects an increasing difficulty Mosaic faces in extracting phosphate rock from the ground. So a ton of DAP that retails for $750 a ton likely costs the company $575 a ton to produce, Linville says.
“It’s not a scam,” he says. “They are one of the most expensive phosphate producers in the world. They will do anything to survive. »
A world of haves and have-nots
Fertilizers are expensive as supplies have tightened. It started in 2021 when China, the world’s largest anhydrous manufacturer and user, stopped exporting phosphate due to domestic food concerns. No one knows if or when it will return to the market. While the United States did not buy much phosphate from China, the country accounted for 30% of the world’s phosphate trade. Other countries have started hoarding in response to security concerns and rising food prices.
But the biggest concern of all is Russia. According to the FAO, the Russian Federation ranked last year as the world’s largest exporter of nitrogen fertilizers, the second supplier of potassium fertilizers and the third largest exporter of phosphorus fertilizers. By cutting off natural gas to Europe, it crippled one of the world’s main suppliers of anhydrous ammonia. European factories are now closed until further notice, turning an entire region from a supplier into a buyer that all other farmers must compete with.
“The result has been a surge in global N values when it comes to losing an entire producing region,” Linville says.
At least American farmers don’t have the same worries as their European counterparts.
“We’re actually somewhat insulated from the global fertilizer shortage,” says Farm Futures grain market analyst Jacqueline Holland. “We can produce most of our own fertilizers.”
Could expanding fertilizer production be the answer to supply shortages? Sure.
But with the Black Sea conflict and global fears of a global recession, companies are avoiding big expansion plans because it takes too long to see returns.
“That’s what we’re seeing on Wall Street right now – shareholders are opting for short-term plans that guarantee a good dividend next quarter,” Holland says. “If you start talking about investing billions in a plant that won’t be profitable for a decade, shareholders don’t want that, especially if farmers are willing to pay higher prices – which they are.”
Win or lose in Ukraine, Russia is trying to restructure the world order through food supply. It’s weaponized fertilizer, to use a phrase Newsweek used in a summer op-ed. He takes care of the fertilizer needs of his friends in China and India, which leads to political gains.
Nearer countries, such as Mexico and Brazil, depend on fertilizer imports. There is no doubt that Russia will try to make political inroads as it increases its export sales in these countries. Several countries in Latin America, Eastern Europe and Central Asia depend on Russia for more than 30% of their fertilizer needs. The same is true in Africa: Ghana, for example, buys half of its fertilizers from Russia. Iran, which is not a friend of the United States, also sends fertilizers to Brazil.
Where does that leave us? Vulnerable.
“Few friends produce what we need, apart from Canada and its potash,” notes Linville. The Russian economy is suffering but not as much as one might expect, as Brazil and India have no problem buying their fertilizers.