INSIGHT: Unsettling market conditions have potential to impact US fertilizer and agriculture industries

Mark Milam

15-Nov-2021

HOUSTON (ICIS)–Like a cotton grower watching dark skies accumulating just as their field of white bolls are prying open, bringing the threat of unavoidable loss, the domestic US fertilizer market is seeing unsettling conditions that have been steadily gathering on the horizon.

Fuelled by the lift in natural gas feedstock prices and the subsequent sidelining of production, the price for the major crop nutrients are now greatly escalated and have swept up the costs of the other inputs, like fuel and seed, which are needed for a season thereby building up a potential storm of impacts.

While the market cautiously watches, the uncertainty has given life to a term that had been dormant for some time, that phrase being – demand destruction. It, like an unruly patch of weeds flourishing in a row of developing crops, can be unsettling.

Yet the phrase is being used often these days as for the first time in many years the skyrocketing cost of putting in the next crop may see farmers take some drastic actions.

Those could include forgoing fall inputs and changing their post-harvest tillage patterns. There could also be those who reduce acreage or take to switching to another less nutrient-intensive crop with soybeans showing serious potential for outpacing corn next year.

There could also be growers who cut back their rate of applications in the short term or even skip some of their typical usage. Marginal land could be left out of the rotation or used for a crop that has minimal input needs.

As one corn and cotton farmer recently observed, there is growing thought of using less fertilizer or selecting something to grow other than corn, saying “there are just so many unknowns for this spring, and every week it is higher and corn prices are not going up as fast.”

A market source said farmers are expressing their displeasure but also beginning to recognise the reality of the current market, saying “nobody likes to pay higher prices but what I am hearing from them is I’m still… [angry] but I understand it.”

When it comes to difficulties facing farmers, the fertilizer industry has recently begun to address the high prices and express confidence that consumption or plantings will not be affected.

With the farmers want to farm mantra having increased in volumes over the last few weeks, both producers and trades are optimistic that farmers will make solid decisions on their nutrient needs and get through this challenging spring period.

Producer Mosaic is among those who recently said that it is confident that farmers will get the supply they need and not be inclined to skip nutrients.

“I mean our own belief is farmers like to farm. They’re not going to sacrifice yield by not fertilizing. That just is not a good economic solution to the problem,” said Mosaic CEO Joc O’Rourke.

Addressing whether there will be demand destruction and lower production because of the soaring costs, CF Industries CEO Tony Will said he does not view the situation in that fashion. “There is a real shortage of nitrogen and price has got to basically arbitrate who’s going to get the scarce tonnes that are out there,” he commented.

“It’s not so much that you are going to destroy demand, there’s going to be a lot of unmet demand that’s going to be pent-up, and so we do think yield is going to be on a global basis off next year. Again, not because of demand destruction, just because there’s not enough tonnes available.”

Some are concerned that the recent run of elevated prices will last well past next spring’s sowings, especially if key fundamentals do not improve, most notably natural gas costs.

Supply could become a major issue with the drop in global output and there are many concerns over how the recent movement by countries to restrict imports could weigh on Nola (New Orleans) direction going forward.

Even with a surge in imports over this year, US availability has stayed tight with more pressure coming next quarter when demand cranks back up.

Crop prices have been mostly favourable this year which is a positive factor that fertilizer participants are projecting will carry forward into 2022 and provide potential relief to growers.

There is the question of how a major shift to soybeans would impact commodity futures and would investing in a corn or cotton crop be more profitable if supply is reduced for that acreage.

An October report from the University of Illinois noted that “the higher fertilizer prices will increase costs, reduce recommended nitrogen application rates, and reduce the profitability of corn relative to soybeans.”

There have been some early estimates that approximately 3m acres could change from corn to soybeans, which could result in both crops coming in at around 90m acres planted.

While ammonia and urea are top contenders for seeing reduced usage, it is likely that any cuts are impacting all nutrients, with a market source saying, “phosphate and potash demand could feasibly drop even if acres remain high as many farmers might make the decision to reduce or skip their potash and phosphate applications at these types of prices, especially if they have kept soil levels high.”

Growers who have been putting inputs at normal rates and have engaged in soil testing would be best suited to weather the lack of fertilizers, potentially withstanding a skip of one season of their fertilizing. Choosing to undertake a no-till or strip tillage approach to field work would help preserve more of the nutrient build up and crop residual value.

Some growers have already elected to forego the fall run but at the same time they did lock in a quantity of their spring needs but not at the same level that they would typically commit.

Part of this is over worries of being forced to grow corn to see a profit amid the record setting costs for farm inputs.

Like the approaching dark clouds and deep rumbling of a storm, all sides of the market can sense what might be coming. But until farmers make clear their planting and fertilizing intentions it is not known to what extent the impacts will be.

Yet, much like rain pouring down from the heavy storm as it passes, it will be felt by all in its path.

Insight by Mark Milam

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