Fertilizer supply tightness and weather events seen challenging food security in 2022-2023
While fertilizer inventories saw some increases and demand showed some softening in mid-2022, reduced nitrogen availability combined with weather events will not only keep supply tight but test food security and may create instability.
Supply of urea, produced from ammonia and high in nitrogen, has seen tightness in part as some European production was shut down after natural gas price increases in Europe turned feedstock too expensive to continue to operate. This reduction in fertilizer production will combine with weather to pose risks to food availability.
Besides ammonia-based urea challenges, supply of other fertilizers is seeing challenges with countries unable to export or purposefully restricting exports. Parts of the world have already suffered the consequences of nutrient shortages, as was the case of Sri Lanka, said Bert Frost, vicepresident of CF Industries, during a presentation at Jefferies Industrials on Aug. 10, 2022.
CF Industries, based in Deerfield, Illinois and which has seven of its nine plants in North America, enjoys the benefits of operating in a region with natural gas cost advantages.
Joc O'Rourke, CEO at The Mosaic Co., separately said drought and heat may complicate the global food outlook.
European capacity out
As of Aug. 10 TTF (Netherlands) gas “is running in the high $50 to low $60s per MM Btu (…) we are in North America at today´s almost $8 gas,” Frost said. That makes North America much more cost efficient to produce gas-based fertilizer and run plants.
“So, what is taking place today is a number of those European producers are shutting down and they are having to import ammonia to run their upgrades. To make their industrial products (…) then the finished products for fertilizer (…),” he added.
“And this dynamic is something that hasn´t taken place to this degree. Part of it is a reflection of what has happened in Russia and Ukraine, with limited product coming from that market into Europe and the other issue is the restricted gas because of Nord Stream 1,” he added.
The Nord Stream 1 is a 745-mile subsea pipeline from Russia to Germany that started operations in 2011. In 2022 natural gas flows from Russia to Germany have diminished and look uncertain.
“Food issues” looming
“Globally you are seeing a very tight nitrogen market specifically today ammonia, but in the future the finished products, and that is why pricing is at the level that it is, or one of the reasons why it is, and that eventually would lead us into some of the food issues,” Frost said.
When you look at the plants that have announced shutdowns BASF, Fertiberia, Yara, OCI, and others, it´s substantial,” he said. Other plants that didn´t shut may be running at reduced rates, he said.
“So we don´t see the full shutdown of European assets but it can be 10 million tonnes in a world of 180 millon tons of consumption (…),” he said.
China “historically has exported urea in the range of four to six million tonnes that has represented 10% of the global urea trade so you have a lack of supply from regions that in the past supplied significant amount of tonnage. And now an additional position needs to be filled,” Frost said.
Yields may be halved
Nitrogen “is not substitutable, is not replaceable, and without it yields drop up to 50%,” he said.
“If you are familiar with what happened in Sri Lanka, with the governmental decision to not import fertilizer and to go organic,” the consequences of lacking nitrogen may be evident, Frost said.
There were protests in July 2022 in Colombo, Sri Lanka, after the president fled the country amid scarcity not just of food but also of fuel and other basic items.
The “collapse in the government and the president having to leave the country (was) really driven by fertilizer and so what we are and where we are in this development in the world is these things are playing out in real time,” Frost added.
In addition to the limited supply, “there is only one or two plants operating in South America, with substantial demand and continuing to increase,” Frost said.
Fifteen years ago Brazil was importing two million tons of urea, "today it´s seven to eight. India was probably five to six. Today that is 10. Those are the two biggest import markets in the world. And then we are the third in North America, importing five (million tons of urea),” Frost said.
High temperatures and drought
Joc O'Rourke, CEO at The Mosaic Co., said on Aug. 2 that a combination of factors well beyond Russia-Ukraine supply issues was posing risks to global food security, according to a transcript of the second quarter earnings call by The Motley Fool.
“Europe and U.S. have experienced very high temperatures, while Southern Brazil is showing signs of drought conditions,” he said.
Each of these issues alone can have a material effect on global crop production but together the risk to food security is significant, O´Rourke added.
This suggests global stock-to-use ratios, already near 20-year lows, will remain under pressure and because of this, there will be “a tight supply and demand scenario for global grains and oilseeds” through 2022 and into 2023, he said.
Brazilian demand led pricing in first half 2022
Brazil, where O´Rourke estimated 85% of fertilizer used in the country is imported, made efforts to secure supplies.
“At the start of the year, there was a huge concern with the constrained supply over whether or not the country could get the fertilizer it needed for its planting,” he said, according to the Motley Fool transcript.
The Agriculture minister and the country´s president both traveled “the world to ensure that imports would be available for Brazil,” added O´Rourke, CEO of the Tampa, Florida-based company.
“As such, Brazil led pricing in the first half of the year for around the world,” he said.
Farmers in areas with the most developed and organized agriculture industry in the region like Argentina, Brazil and North America met earlier in the year their fertilizer needs.
By Renzo Pipoli