Among farmers and ranchers very few topics are being discussed as much as the skyrocketing cost of fertilizer and increasing concerns regarding availability. Given that fertilizer costs account for about 15 percent of total cash costs in the United States, fertilizer prices are the No. 1 issue on farmer minds as they begin to plan purchases for the 2022 growing season.
Unfortunately the fertilizer sticker price farmers in some areas are reporting has increased more than 300 percent – and delivery times are anyone’s best guess. We’ve seen this before, in 2008. During the 12 months ending in April 2008, nitrogen prices increased 32 percent, phosphate prices increased 93 percent and potash prices increased 100 percent. Prices remained there through 2009 and then decreased, ultimately returning to pre-2007 levels by the end of 2009. That price surge was associated with strong domestic and global demand, reduced fertilizer inventories and the inability of the U.S. fertilizer industry to adjust production levels. This time around those same factors are at play, along with several others that add an extra layer of uncertainty.
This article dives into a number of the short- and long-run factors impacting fertilizer supply and demand to provide context to the increasingly expensive production input.
All major nutrients used in the production of primary row crops in the United States –nitrogen in the forms of anhydrous ammonia, urea or liquid nitrogen, phosphorus such as diammonium phosphate and monoammonium phosphate, and potassium or potash – have experienced varying degrees of increasing prices.
We compare prices to September 2020 prices.
• Ammonia has increased more than 210 percent.
• Liquid nitrogen has increased more than 159 percent.
• Urea has increased 155 percent.
• Monoammonium phosphate – MAP – has increased 125 percent.
• Diammonium phosphate – DAP – has increased more than 100 percent.
• Potash has increased by more than 134 percent.
We then looked at the average price of each nutrient since September 2008, as collected in the Illinois cost-of-production dataset.
• Anhydrous ammonia has increased by 118 percent as compared to its average of $656 per metric ton.
• Urea has increased by 101 percent from its average of $453 per metric ton.
• Liquid nitrogen has increased 84 percent from its average of $305 per metric ton.
• Diammonium phosphate – DAP – has increased 50 percent from its average of $550 per metric ton.
• Monoammonium phosphate – MAP – has increased 61 percent from its average of $555 per metric ton.
• Potash has increased 61 percent from its average of $485 per metric ton.
Fertilizer is a global commodity and can be influenced by multiple market factors beyond the control of U.S. producers. Similar to globally traded commodities, 44 percent of all fertilizer materials are exported to a different country. That factor has an outsized impact on fertilizer prices because fertilizer production is not only influenced by what is occurring where it’s produced or the cost of production in that country, but also by numerous other countries demanding fertilizer products and the transportation rates to take the fertilizer to its final destination.
Global fertilizer demand increases
Two-thirds of global fertilizer demand is driven primarily by six crops. Globally corn represents about 16 percent of the farm-use fertilizer demand, with wheat a close second at about 15 percent of global farm-use fertilizer demand. Rice represents about 14 percent of global farm-use fertilizer demand, followed by vegetables at 9 percent, fruits at 7 percent and soybeans at 5 percent.
As a large producer of corn, soybeans and wheat, the United States is a large consumer of fertilizer. But with increased technology and innovation for on-farm products, the use of fertilizer in the United States has decreased despite increased planted acres of those crops. At peak use during the 1980-1981 fiscal year, the United States used 23.7 million nutrient tons. But that has pulled back due to the adoption of precision fertilizer application. In the most recent data available – 2015-2016 – U.S. nutrient use was reported at 22.1 million nutrient tons. Corn represents about 49 percent of the share of U.S. nutrient use, while wheat accounts for about 11 percent and soybeans account for 10 percent. Cumulatively those three crops account for about 70 percent of U.S. fertilizer consumption.
Though the United States has decreased its overall consumption of global nutrient use, other countries have increased nutrient use. Back in the 1960s the United States accounted for 25 percent of global nutrient use. Currently the United States only accounts for about 10 percent of global use, with U.S. farmers representing only 2 percent of that share.
Consider domestic production vs. imports
The United States is the third-largest producer of fertilizer globally. But it still requires the importation of all three nutrients, especially nitrogen and potash, to fully meet demand. That means U.S. fertilizer dealers and U.S. producers are required to pay the price defined by the global market for fertilizer and fertilizer materials, plus transportation.
U.S. ammonia was produced in 2020 at 36 domestic plants and shipped around the country by pipeline, rail, barge and truck. According to the most recent data from the International Fertilizer Association, in 2018 the United States ranked second in nitrogen production.
• China produced 24.6 percent of global nitrogen production.
• The United States produced 11.6 percent of global production.
• India, third-largest global producer of nitrogen, produced 11.3 percent of global supply.
For phosphate production the United States also ranked second, with 9.9 percent of global production – behind China, which produced 37.7 percent, and again ahead of India, with 9.8 percent of the global supply of phosphate.
For potassium potash, Canada leads the way in production representing 31.9 percent of global production, followed by Belarus, which produces 16.5 percent of global supply. Russia is a close third; it produces 16.1 percent of potassium global supply. China ranks fourth. In total, about 80 percent of the world’s potash comes from those four countries. The United States ranks 11th in potassium production, with only 0.8 percent of global supply coming from the United States.
When it comes to global exports, the United States is not a major fertilizer exporter. The United States holds a share of about 4.6 percent of the nitrogen exports, ranking seventh. Russia is first, with 16.5 percent of exported nitrogen, followed by China with about 11.2 percent of share in nitrogen exports and Saudi Arabia, which holds a share of 6.4 percent of nitrogen exports.
Of phosphate exports, the fourth-ranked United States represents about 11.8 percent. China is first in phosphate exports, holding a share of 25.2 percent of global phosphate exports, followed by Morocco with a share of 17.4 percent and Russia with a share of 12.7 percent of global phosphate exports. Of the global potassium exports, the United States represents less than 1 percent of global exports and ranks 12th among other countries. Canada holds the largest share of global potassium exports with 36.2 percent, followed by Belarus with an export share of 18.5 percent and Russia, which represents 16.5 percent of global potassium exports.
Energy, other variable costs increasing
To make fertilizer, along with globally priced raw materials, production facilities require a large amount of energy to convert raw chemical materials into an applicable farm-use state. For example anhydrous ammonia is produced by the Haber-Bosch process in which nitrogen is combined with hydrogen to synthesize the ammonia, using natural gas as the source of the hydrogen as well as the energy for synthesizing.
Because natural gas is the primary building block for most nitrogen fertilizers, it takes about 33 million metric British thermal units per material ton of ammonia to make the conversion. That accounts for 70 percent to 90 percent of the production variable costs in the synthesis process. Natural gas prices have increased dramatically during the past few months, especially in Europe. There they have increased more than 300 percent since March 2021, which has forced many European Union nitrogen plants to close. Plus plants built for that process typically take about three to five years to build; they cost $3 billion to $5 billion. The long-run impact is that when a demand surge occurs, the response time to fulfill supply via an additional production facility will lag about three to five years – at a significant price tag.
Speaking to the natural-gas-price spike, during the February freeze throughout Texas much of the natural-gas production was interrupted or shifted away from regular uses; it was pushed to Texas due to the demand spike. That forced U.S. ammonia plants in Oklahoma, Texas and Louisiana to shut down during that time and cut about 250,000 tons of production. Combined they account for about 60 percent of production, Then Hurricane Ida hit those areas and production was paused once again.
Amid those production halts delayed plant turnarounds from COVID were stopped again, just as plants were trying to meet demand. That caused more production disruptions, either for much-needed regular maintenance or issues that have occurred as a result of delayed maintenance. Those plant turnarounds are necessary and essential to maintain the chemical processes and safety of fertilizer-production plants. Many plant turnarounds were delayed during the worst of COVID as precautions at production facilities were implemented. Companies contracted to perform those turnarounds were asked to delay visits until it was safe to bring external employees back on-site. Those disruptions are enough to cause a slight decrease in availability. That was despite the United States spending the past few years increasing its number of production plants to match almost the same number as in 2002, as influenced by reduced natural-gas prices from 2009 through the end of 2020.
Short-term costs, like increased natural-gas prices and production delays, have a direct impact on production because they create diseconomies of scale. When the short-term variable cost of production increases to more than the average cost of production in the long run, a production facility cannot maintain that level of production in an economically viable way. It will scale back production and look for alternatives to backfill supply. With fertilizer as the price of natural gas skyrockets and increases the cost of production – as in the case of synthesizing ammonia – U.S. producers can no longer compete with other global producers who may have a lesser cost of production. That results in a pull-back of production and a search for supply elsewhere, typically via imports. In the case of ammonia – even with domestic U.S. ammonia production – the United States must still import as much as 30 percent of its nitrogen in the 2019-2020 fiscal year to as much as 59 percent back in the 2005-2006 fiscal year; it must purchase at the global price plus transit costs.
Other fertilizer nutrients have similar production-cost woes. Converting phosphate rock from a raw product to its fertilizer-use form is a different process that involves surface mining. The soil and rock covering the phosphate must be removed using large draglines that are often five stories high. Those draglines are very large and very expensive pieces of equipment that operate using electricity, which has become even more expensive. That puts phosphate-based fertilizers in a similar situation as ammonia-conversion plants, looking to supply the product at a reduced cost elsewhere. And again though potash production is done via mines for potassium, they also operate on electricity. Those mines are anywhere from a kilometer to a mile underground around the world, with only about 10 countries that produce potash and even fewer countries that export the product. That causes a further tightening of supply.
Fertilizer demand impacts production
Further impacting fertilizer supply is the reaction to COVID-19 precautions along with the continuing “accordion effect” throughout the economy. Essentially the entire supply chain, including fertilizer production and distribution, is working overtime after being forced to slow or stall in response to pandemic-safety precautions.
The market outlook for commodities during summer 2020 was bleak for producers, before massive export buying began in September 2020. The farm economy was uncertain and commodity prices were at reduced and unpredictable levels.
• The corn price in June 2020 was $3.20 per bushel, the smallest level since 2006.
• Soybeans were estimated to be $8.20 per bushel, the smallest price since 2006.
• Wheat was $4.60 per bushel, the smallest level since 2016.
Similarly from mid-2019 to mid-2020, fertilizer prices were at or very near their smallest levels since 2016 and 2017, depending on the nutrient. The International Fertilizer Association produces a fertilizer forecast for global demand about every six months. Prior to COVID-19 in December 2019, the International Fertilizer Association was forecasting a decrease in global fertilizer demand, with about a 1 percent increase in demand during the next two years.
• Global fertilizer demand for the 2017-2018 fiscal year was set at 190.1 million metric tons of nutrients.
• The 2018-2019 fiscal year was set to be 188.8 million metric tons.
• The 2019-2020 global fertilizer demand was expected to be 190.5 million metric tons.
• The 2020-2021 global fertilizer demand was expected at 192.9 million metric tons.
When COVID-19 took hold and a flurry of uncertainty arose, forecasts for fertilizer demand grew more pessimistic. Demand was expected to decrease significantly, according to the new July 2020 forecast. Expectations of global fertilizer demand for the 2019-2020 fiscal year were decreased from 190.5 million metric tons to 189.9 million metric tons. Global fertilizer demand for the 2020-2021 fiscal year was expected to decrease from 192.9 million metric tons to 184.4 million metric tons, a decrease of 4.5 percent.
Expectations for the newest 2021-2022 fiscal year set global fertilizer demand expectation at 189 million metric tons. Suppliers and producers responded accordingly and decreased production – and implied that the outlook indicates no signals of any kind that would cause an increase in production or an increase in imports of raw materials.
Then unexpectedly massive export buying of commodities quickly improved the commodity-price outlook – particularly for corn, soybeans and wheat.
• By April 2021 the U.S. Department of Agriculture forecasts indicate the corn price to be $4.30 per bushel, an increase of 34 percent and the best price since 2013.
• Soybeans were estimated to be $11.25 per bushel, an increase of 37 percent and also the best price since 2013.
• Wheat came in at $5 per bushel, an increase of 8 percent, and continues to improve – going to more than $6 per bushel.
Increases in commodity prices drive farmers to plant more-profitable crops. The market outlook for farm-economy conditions had significantly improved. And 2021 planted crop acres for corn, soybeans and wheat were expected to increase, rather than decrease or stay stagnant compared to 2020.
The new International Fertilizer Association forecast released in November 2020 reflected those changes, indicating an increase in global fertilizer demand. The newest forecast showed an even greater demand for fertilizer than forecasts prior to COVID-19, which is what we continue to see as farmers look to lock in input prices for the 2022 growing season. The most recent forecast for global fertilizer demand for the 2019-2020 fiscal year kept expectations at 189.9 million metric tons.
But increased expectations for global fertilizer demand in the 2020-2021 fiscal year moved from 184.4 million metric tons to 193.5 million metric tons, which is more than the expectations in December 2019 of 192.9 million metric tons. Expectations for the newest 2021-2022 fiscal year moved from original estimates of 189 million metric tons to 195.6 million metric tons, an increase of 3.5 percent. The gap of expected demand between July 2020 and November 2020 is the shortage of supply that production plants are working to fulfill.
The narrowing of fertilizer demand followed by a quick expansion, rather than a slow return, created another supply-chain shock. Under initial pandemic-safety precautions, early forecasts anticipated a negative impact on global fertilizer demand. Market reactions to the forecast caused production rationing. Then the rapid increase in row-crop prices led to quick reactions for increased fertilizer demand in the United States and abroad, further tightening supplies already strained due to production and distribution issues.
Distribution, supply chain disrupted
Once fertilizer is converted from raw material to on-farm use it must be transported to retailers for growers to purchase, completing the last link in the supply chain. Currently fuel prices have increased again, along with trucking rates. As more people return to the road, gasoline demand is increasing beyond even pre-COVID-19 levels.
There has been an increase in the number of goods shipped at all stages – raw, processed and consumer-ready. And there’s increased demand for goods delivered directly to end-users, clogging typical distribution chains still challenged from pandemic slowdowns. That pressure and pace have increased shipping rates and labor needs as more people are required to deliver those goods. And fertilizer, as a globally exported-imported product that needs to be delivered to rural areas, has been greatly affected.
Hurricanes, ice storms, labor issues, additional manufacturing capacity and infrastructure breakdowns – including rail-logistics issues and increased freight rates – have caused even more production and distribution disruptions.
Consider trade duties
Along with increased shipping rates for the 44 percent of fertilizer that’s exported around the world, anti-dumping trade-dispute cases are also likely increasing fertilizer costs, though there’s not enough current publicly available data to indicate by how much. U.S. imports of fertilizer materials in 2018 from Morocco and Russia increased by more than 2.4 million metric tons. Then the anti-dumping case was filed against those countries and imports to the United States from Morocco and Russia declined. Mosaic, the largest U.S. producer of phosphate, won the anti-dumping case; a 30 percent tariff was applied to phosphate imports. CF Industries, the largest U.S. producer of UAN, applied a similar case to Russia regarding liquid nitrogen.
U.S. fertilizer imports in 2019 from Morocco were about 2 million metric tons, an increase of 11 percent compared to 2018. Fertilizer imports from Russia were 729,288 million metric tons, a decrease of about 16 percent compared to 2018. Purchases have shifted to other countries. U.S. imports of ammonia and phosphate are now arriving from countries like Saudi Arabia, Jordan, Australia, Mexico, Lithuania and Egypt. That shift is in search of other imports that are more likely to arrive at a price less than an applied tariff rate, but are likely still to be slightly more than the going global price due to applied transit costs.
Other trades disruptions have played a big role in fertilizer availability and cost; those things build on each other. Sanctions from the European Union have been applied to Belarus; the United States has followed the same process to apply sanctions. As Belarus contributes about 20 percent of global potash exports, those sanctions have slowed and even stopped shipments of potash to the EU and the United States. According to the International Fertilizer Association, those sanctions are also discouraging other countries from buying from Belarus, forcing an overall lessened contribution of global potash supply.
China applied an export ban on phosphate at the end of September, due to increasing costs of production and domestic use. With China accounting for 25 percent of phosphate fertilizer exports globally, that export ban puts even more pressure on prices. There’s potential for China to also apply an export ban to urea; China contributes about 10 percent of global urea exports.
In addition to trade disputes, countries are implementing policies that impact global prices. For example India has approved an additional $3.8 billion to increase the fertilizer subsidy for its farmers, causing fertilizer demand in India to continue to increase, increasing prices for global buyers.
Planting intentions impacted
Given all those factors, fertilizer prices are expected to remain inflated through springtime, which may compel some farmers to shift planted acres away from corn to commodities that use fertilizer at a smaller rate like soybeans or wheat. With the price of ammonia about 85 percent correlated with the price of corn, farmers must consider whether the increased cost of fertilizer and other inputs can be recovered by cash receipts from crop revenues in order to break even. There are also expectations retailers will need to turn away customers because they will not be able to deliver fertilizer products on time, increasing the need for supply-chain and infrastructure improvements.
When keeping financial records, business owners have two accounting methods to choose from – cash basis accounting or accrual accounting. The difference between the two methods lies in the timing of when farmers record sales and purchases. Under the cash basis, revenue is recorded when cash is received from customers; expenses are recorded when cash is paid to suppliers and employees. Under the accrual basis, revenue is recorded when earned and expenses are recorded when consumed.
The Internal Revenue Service allows farmers to use the cash method of accounting for their tax returns, and most choose that option. Cash accounting requires income from selling farm products to be reported in the year they are sold, which may differ from the year in which they were produced. Likewise, under cash accounting the costs of farm inputs and services are reported in the year in which they are paid for, which may differ from the year in which they are used.
The fact the cash method is utilized by most farmers is important in the discussion regarding fertilizer prices. Many farmers will purchase inputs needed for the next growing year, like fertilizer, in the waning months of the calendar year to reduce farm income and subsequently reduce their tax liability in the current year. This year many farmers have been unable to purchase their fertilizer for 2022 and as a result will likely face an increased tax bill in 2021.
Tariff relief needed
Price increases, especially price increases that can be mitigated or avoided such as the application of import duties, can have an impact on a farm’s bottom line. Imports are an important part of the fertilizer supply to farmers. The application of the duties that are potentially in effect for five years, with the possibility of extension, will result in a continued constricted supply and an imposed increased price for users. From experience, America’s farmers know that imposing the requested anti-dumping and countervailing duties on fertilizer imports will add to agricultural-production costs and request that they be removed.
U.S. agricultural-production costs are increasingly important to the near- and long-term viability of U.S. farms. Fertilizer prices are the issue top of mind for farmers heading into 2022, because fertilizer costs account for about 15 percent of total cash costs in the United States. All major crop-production nutrients have experienced increased prices when compared to September 2020,
• Ammonia has increased more than 210 percent.
• Liquid nitrogen has increased more than 159 percent.
• Urea has increased 155 percent.
• MAP has increased 125 percent.
• DAP has increased by more than 100 percent.
• Potash has increased by more than 134 percent.
While that information helps to understand the factors causing one of a farmer’s biggest concerns, it doesn’t alleviate the increasing input costs that are out of their control. Many farmers believe those increasing input prices are taking away the momentum provided by the increased commodity prices that were going to help them break even or be more than the bottom line.
Shelby Myers is an economist with the American Farm Bureau Federation’s Market Intel. Visit www.fb.org/market-intel for more information.