Many farmers and ranchers worry about rising fertilizer prices and dwindling supplies, which is driving the conversation. Fungicide prices top farmers’ concerns as they plan purchases for the upcoming growing season in 2022. Fertilizer costs account for 15% of overall cash costs in the United States. Farmers in certain places are reporting a sticker price increase of more than 300 percent and delivery times that are anyone’s guess. In 2008, we saw something similar. Nitrogen prices rose by 32%, phosphate prices by 93%, and potash prices by 100% in the year that ended April 2008. Price levels stayed stable into 2009 and then began to fall, eventually returning to their pre-2007 levels by the end of the year. Increased demand, short stockpiles, and the inability of the U.S. fertilizer sector to modify production levels all contributed to the price increase. Those same variables, along with a few more, are in play this time around, raising the level of uncertainty even further.
In order to understand why fertilizer is becoming increasingly expensive, this article examines a number of short- and long-term factors influencing supply and demand.
Prices for all three major nutrients used in row crop production in the United States, namely nitrogen, phosphorus and potassium, have all seen an increase in their prices over the last several years.. Since September 2020, ammonia prices have jumped by more than 200%, while the price of liquid nitrogen has more than 150%, urea is 155% more than it was in the same period last year, and MAP is 125% higher.
Since September 2008, anhydrous ammonia has increased by 118% above its average price of $656 a metric ton, while urea has increased by 101%, liquid nitrogen has increased by 84%, DAP by 50%, and MAP has increased by 61% from its average price of $555 a metric ton, according to data collected by the Illinois cost of production dataset.
There are a variety of market factors beyond the control of U.S. fertilizer manufacturers that can affect the price of fertilizer around the world. 44 percent of all fertilizer materials are exported, just like other globally traded goods. In addition to the country where the fertilizer is produced and its production costs, the demand for fertilizer products in other countries and the transportation costs to get the fertilizer to its final destination have a significant impact on fertilizer prices.
Demand for Fertilizers in the World Is Growing
Six crops account for two-thirds of global fertilizer demand. Corn accounts for around 16 percent of the world’s farm-use fertilizer requirement, while wheat comes in a close second with roughly 15 percent. Rice, followed by vegetables, fruits, and soybeans, account for around 14 percent of global farm-use fertilizer demand.
Considering how much corn, soybeans, and wheat the United States grows, it’s no surprise that the country uses a lot of fertilizer. However, the use of fertilizer in the United States has declined as a result of greater technology and innovation for on-farm products. According to the most recent data available, the United States utilized 22.1 million nutrient tons in 2015/16, a decrease from 23.7 million nutrient tons in the 1980/81 fiscal year, due to the adoption of precision fertilizer application. For the United States, corn accounts for roughly 49% of the country’s nutritional utilization, while wheat and soybeans each account for 11%. These three crops account for over 70% of the country’s total fertilizer use.
Others have boosted their nutrient use even as the United States has decreased its worldwide nutrient use. As recently as the 1960s, the United States was responsible for 25% of global nutrient consumption. US farmers account for only 2% of global usage, which is a long cry from the 10% the U.S. responsible for today.
Factors Influencing the Supply Chain
Domestic vs. Imported Production
All three nutrients (nitrogen, potash, and phosphorus) must be imported by the United States in order to meet the country’s needs. As a result, the global market price for fertilizer and fertilizer components, as well as transportation, must be paid by US fertilizer dealers or producers.
Ammonia will be manufactured in the United States at 36 domestic facilities in 2020 and transported across the country through pipeline, rail, barge, and truck in that year. Using data from the International Fertilizer Association, the United States placed second in nitrogen production, accounting for 11.6 percent of global production in 2018, behind China and ahead of India, which accounted for 11.3 percent of global supply. U.S. output of phosphate was second only to China, which produced 37.7 percent of the world’s phosphate and was ahead of India, which produced 9.8 percent of the world’s phosphate. With a production of 31.9 percent, Canada is the largest producer of potassium potash, followed by Belarus, which accounts for 16.6 percent of global supply. In third place comes Russia, which generates 16.1% of the world’s potassium supply. China comes in at number four. An estimated 80% of all potash is produced in these four nations. Only 0.8 percent of the world’s potassium supply comes from the United States, which ranks 11th in output.
The United States is not a large exporter of fertilizer on a global scale. The United States has a 4.6 percent share in nitrogen exports, placing it eighth in the global rankings. In terms of nitrogen exports, Russia is the largest country, accounting for 16.5 percent of the total, followed by China (11.2%), and Saudi Arabia (6.4%).
About 11.8 percent of phosphate exports come from the United States, which is placed fourth. China is the world’s largest exporter of phosphate, accounting for 25.2 percent of worldwide exports, followed by Morocco with 17.4 percent, and Russia with 12.7 percent. There is less than 1% of worldwide potassium exports coming from the United States, and it ranks 12th among other countries. Canadian potassium exports account for 36.2% of global exports. Belarus accounts for 18.5% of global potassium exports. Russia accounts for 16.52%.
An Increase in the Cost of Energy and Other Variables
Fertilizer production facilities require a significant amount of energy to transform raw chemical components into forms suitable for farm usage, in addition to the globally costly raw materials. The Haber-Bosch process, for example, produces anhydrous ammonia by combining nitrogen and hydrogen to synthesis ammonia, with natural gas serving as both a hydrogen supply and an energy source. A material ton of ammonia converts to around 33 million metric British thermal units (MMBtu) of heat, which is the fundamental building component for most nitrogen fertilizers. In the synthesis process, here is where 70% to 90% of the variable expenses are incurred. Price hikes in recent months have resulted in several EU nitrogen factories being forced to shut down, especially in Europe, where costs have climbed by over 300% since March 2021. This method normally requires three to five years of construction and a price tag of up to $3.5 million for a plant to be developed. The long-term effect is that when demand spikes, an extra production facility’s reaction time to meet supply will be three to five years and come with a hefty price tag.
A major reason for the rise in natural gas prices was the February freeze in Texas, which resulted in a significant reduction in natural gas production in other states. This resulted in a 250,000-ton reduction in output due to the closure of 60 percent of the country’s ammonia factories in Oklahoma, Texas, and Louisiana. Then came Hurricane Ida, which put a stop to manufacturing once more.
Delays in turnaround times at COVID’s plants continued in the midst of these production halts. Whether it was due to issues that arose as a result of the delayed maintenance or the requirement for regular, necessary maintenance, this resulted in further interruptions in production. The chemical operations and safety of fertilizer producing plants necessitate these plant turnarounds. During the worst of COVID, several plant turnarounds were postponed due to precautions taken at production facilities and requests made to the businesses hired to undertake these turnarounds to delay visits until external staff could return to the site in a safe manner. A modest decline in availability is caused by these disruptions, even though the United States has spent the previous few years growing its production plants to match almost the same number of production plants as in 2002, as affected by reduced natural gas prices from 2009 through the end of 2020.
Increases in natural gas prices and production delays, for example, have a direct influence on production because they create inefficiencies of scale. Production facilities can no longer maintain their current level of output if the short-term variable cost of producing exceeds the long-term average cost. It’s going to reduce output and start looking for other ways to fill the gap. U.S. fertilizer companies may no longer compete with worldwide producers who may have a cheaper cost of production as a result of rising natural gas prices, as in the case of ammonia synthesis. As a result, production is reduced, and companies are forced to look for supplies elsewhere, usually through imports. It is estimated that the United States imports as much as 59% of its nitrogen in the 2005/06 fiscal year, despite having its own domestic ammonia production. This nitrogen is purchased at worldwide market prices plus transit costs.
The production costs of other fertilizer nutrients are also high. Using surface mining, phosphate rock can be transformed from a raw material to a fertilizer. Draglines of up to five stories high are used to remove the soil and rock that covers the phosphate. Large and expensive draglines that use energy have become even more expensive in the last few years. As with ammonia conversion plants, phosphate-based fertilizers find themselves in a similar predicament. Although potash production is carried out by mining potassium, these mines also use power. There are only a few nations that produce potash, and even fewer countries that export it, resulting in a further reduction in availability.
Changing Fertilizer Consumption Forecasts Affect Production.
Additionally, the response to COVID-19 measures and the continued “accordion effect” throughout the economy are affecting fertilizer supply. As a result of the pandemic safety procedures, the whole supply chain, including fertilizer manufacturing and delivery, is working overtime.
Commodities producers faced a gloomy summer 2020 market outlook before the huge export buying began in September 2020. Commodity prices were volatile and the farm sector was in a state of flux. In June of 2020, the bushel price of maize was $3.20, the lowest since 2006. At $8.20 per bushel, soybeans are the lowest they’ve been since 2006, and wheat is $4.60, the lowest it’s been since 2016.
It is also worth noting that fertilizer prices have been at or close to their lowest levels since 2016 or 2017, depending on the nutrient. Every six months or so, the International Fertilizer Association publishes a fertilizer demand projection for the entire world. A decrease in worldwide fertilizer demand of roughly 1% over the next two years was predicted by IFA before to COVID-19, which took place in December 2019. Global fertilizer demand was estimated at 190.1 million metric tons of nutrients in the 2017/18 fiscal year, 188.8 MMT in the 2018/19 fiscal year, 190.5 MMT in the 2019/20 fiscal year, and 192.9 MMT in the 2020/21 fiscal year.
According to the July 2020 estimate, fertilizer demand is likely to fall dramatically, as COVID-19 took root and a flurry of uncertainty erupted. Global fertilizer demand for the 2019/20 fiscal year was predicted to drop from 190.5 MMT to 189.9 MMT, while global fertilizer demand for the 2020/21 fiscal year was expected to drop from 192.9 MMT to 184.4 MMT, a decrease of 4.5 per cent… For the upcoming fiscal year of 2021/22, worldwide fertilizer demand is expected to be as high as 189 MMT. Suppliers and manufacturers responded by reducing production and implying that the forecast shows no signs that would lead to a rise in production or raw material imports.
Then, out of the blue, significant export purchases of commodities, particularly corn, soybeans, and wheat, quickly improved the outlook for commodity prices. It is expected that by April 2021, the price of maize will rise by 34% to $4.30 per bushel, the highest price since 2013. The price of a bushel of soybeans was estimated at $11.25, a 37% rise and the highest price since 2013. After an 8 percent gain, the price of wheat hit $5 per bushel and has since surpassed $6 per bushel. Farmers plant more profitable crops as commodity prices rise. Due to these improvements in agricultural economic conditions, the planted acreage of corn, soybeans, and wheat in 2021 was predicted to rise rather than fall when compared to that of 2020.
Global fertilizer demand is expected to rise, according to the latest IFA projection, which was released in November 2020. Farmers are locking in their input prices for the coming growing season of 2022, and the latest projection indicates that demand for fertilizer will be even higher than it was before COVID-19. Predictions of 193.5 MMT of global fertilizer demand in the 2020/21 fiscal year have been raised from 184.4 MMT to 193.5 MMT in the most recent projection for the 2019/20 fiscal year, which is higher than the expectations in December 2019 of 192.9 MMT. The initial forecast of 189 MMT has been raised to 195.6 MMT, a 3.5% increase, for the upcoming fiscal year 2021/22. Production factories are attempting to cover the gap in demand between July 2020 and November 2020 because of a lack of supply.
Rather of a steady return, a sharp decrease in fertilizer demand was followed by a rapid expansion, creating another supply chain shock. Early pandemic safety precautions predicted a negative impact on worldwide fertilizer consumption, and the market’s reaction to this forecast led to production rationing in the fertilizer industry. Due to both production and delivery concerns, fertilizer supplies in the United States and abroad were already under pressure due to the rapid spike in row crop prices.
Disruptions to the Distribution and Supply Chain
Fertilizer must be transferred to merchants for purchase by producers after it has been transformed from raw material to on-farm use, completing the final link in the supply chain. The price of fuel and the cost of trucking have both risen recently. Gasoline demand is now higher than it was before COVID-19, as more people get back on the road.
The number of raw, processed, and ready-to-consume items shipped has increased. To say nothing of the rising demand for items supplied directly to end-users, which is overloading traditional distribution chains that are still catching up after pandemic downturn. As more workers are needed to transport these items, shipping costs and labor requirements have increased. Fertilizer, a product that must be carried to rural areas, has also been severely hit by the economic downturn.
Even more production and distribution interruptions have been caused by hurricanes, ice storms, labor challenges, increasing manufacturing capacity, and infrastructure breakdowns, including problems with rail logistics and rising freight charges.
Duties on Trade
Anti-dumping trade dispute lawsuits are expected to increase fertilizer costs as well, however there is not enough current publicly available data to show by how much for the 44% of fertilizer exported around the world. Over 2.4 million tons of fertilizer ingredients were imported into the United States from Morocco and Russia in 2018. Following the filing of the anti-dumping complaint against these countries, imports from Morocco and Russia to the United States decreased. The anti-dumping action was won by Mosaic, the largest phosphate producer in the United States, and a 30% duty was levied to phosphate imports. US producer CF Industries applied a similar scenario to Russia when it came to liquid nitrogen production. On the other hand, imports of Russian fertilizer fell by roughly 16% year-on-year to 729,288 MMT in 2019, while imports from Morocco rose by 11%. Ammonia and phosphate imports from countries like Saudi Arabia, Jordan, Australia, Mexico, Lithuania, and Egypt are now arriving in the United States. As a result of this shift, additional imports that are more likely to arrive at a price lower than an applied tariff rate, but are still likely to be slightly more than the worldwide price due to applied transit costs, will be sought.
Fertilizer availability and cost have been impacted significantly by trade disruptions in other sectors.. As previously said, each of these items builds on the previous one. Belarus has been sanctioned by the European Union and the United States in the same manner. Exports of potash to the EU and the US have slowed or halted entirely as a result of these sanctions, which account for around 20% of the world’s total. It’s also causing other countries to avoid buying from Belarus, resulting in a reduced potash supply for the rest of the world, TFI claims.
In late September, China implemented an export embargo on phosphate due to increased production costs and domestic use. The export ban on phosphate fertilizer puts even more pressure on prices, as 25% of the world’s phosphate fertilizer exports come from China. To the extent that China accounts for 10% of world urea exports, China might impose an export embargo on the product.
Other Aspects of International Relations
Additionally, governments are enacting policies that affect the global price of goods and services. Because of India’s recent approval of an additional $3.8 billion in fertilizer subsidies for its farmers, worldwide demand for fertilizer is expected to surge even further, driving up prices.
Impact
Planting Goals for 2022
It’s possible that some farmers may decide to move their plantings from corn to crops that use less fertilizer, such soybeans or wheat, as a result of these considerations. Farmers must examine if the additional cost of fertilizer and other inputs can be repaid by cash receipts from crop revenues in order to break even. Ammonia’s price is 85 percent associated with the price of maize. Supply chain and infrastructure upgrades are also needed because stores may have to turn away customers if they are unable to deliver fertilizer items on time.
Effects on Taxes in 2021
Business owners can select between cash basis accounting and accrual accounting when compiling their financial statements. When farmers report sales and purchases differs between the two ways. Receipts and expenditures are recorded on a cash basis when money is received in the form of payment from customers and suppliers respectively. Revenue is recorded as soon as it’s earned, and expenses are recorded as soon as they’re incurred on the accrual method.
The IRS permits farmers to file their tax returns using the cash method of accounting, and most of them do so. Income from selling farm products must be reported in cash accounting, which may differ from reporting income from the year they were made. Similar to this, the expenses of farm inputs and services are reported in the year that they are paid for rather than the year that they are actually used under cash accounting.
When discussing fertilizer prices, it’s crucial to keep in mind that most farmers use the cash approach. It is common for farmers to stock up on supplies for the next growing season in late December and early January in order to reduce farm income and thereby lower their tax bill for the current year. The fact that many farmers could not buy their fertilizer for 2022 means that they will have to pay more in taxes next year than they would have otherwise.
Tariff Relief Is Necessary
Import duties, for example, might have a negative effect on the bottom line of a farm if the price hikes are not avoided or minimized. Fertilizer supplied to farmers is heavily reliant on imports. There will be a sustained reduction in supply and higher prices for consumers as a result of the possible five-year extension of the tariffs. Fertilizer import charges imposed by the U.S. government will raise the cost of food production, and as a result, farmers there are calling for the duties to be lifted.
Summary
The long-term viability of U.S. farms is increasingly dependent on agricultural production costs in the United States. Fertilizer prices will be a major concern for farmers in 2022, as they account for 15% of overall cash costs in the United States. When comparing September 2020 prices to September 2020 prices, all major crop production nutrients have experienced price increases: ammonia has increased over 210 percent; liquid nitrogen has increased over 159 percent; urea is up 155 percent; MAP has increased 125 percent; DAP has increased over 100 percent; and potash has risen above 134 percent.
Even though this information sheds light on one of the most pressing issues facing farmers today, it does nothing to lessen the pressure of ever-rising input costs. A growing number of farmers are concerned that rising input costs are scuppering whatever gains they could have made from improving commodity prices.
