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In the world of agribusiness, all eyes are on Russia’s invasion of Ukraine. Counting Belarus, where fertilizer has been under sanction since December, the region ordinarily accounts for around a quarter of global fertilizer exports.
With supplies snarled in the war-torn region, the surging cost of fertilizer is a major factor driving an anticipated food crisis in poor countries, where price spikes can be politically destabilizing. Even before the Russian invasion, fertilizer prices were surging due to supply chain challenges, high global energy prices, and extreme weather including droughts, flooding, and even a hurricane.
“2021 will go down as a year of black swan events for fertilizer,” says Josh Linville, a market analyst at StoneX Group. The financial crisis caused fertilizer prices to leap in 2008. But real-world events triggered this crunch, which several analysts said is the first global supply shortage they have witnessed.
Agricultural and Food Policy Center, Texas A&M University
Monthly average fertilizer nutrient prices, January 1995 to October 2021
Yet the price run-up has deeper roots than a series of ill-timed disruptions. Fertilizer is quickly becoming another sector where turmoil in supply fundamentals—both geopolitical instability and extreme weather—provides an opportunity for dominant firms to sustain extraordinary prices.
THE $127 BILLION GLOBAL chemical fertilizer market revolves around three macronutrients: nitrogen, phosphate, and potassium (or potash), also known by their chemical element names: N, P, and K. Unlike organic fertilizers like manure that have long been used to enhance yields, chemical or “synthetic” fertilizers are mined or man-made. Nitrogen was first synthesized with hydrogen to create industrial-scale fertilizer after World War II, using chemicals left over from the wartime production of explosives. Phosphates and potassium, by contrast, are extracted from mines.
Those physical production constraints help shape markets. Natural gas is the most expensive input to nitrogen production, but you can set up a plant anywhere. As a result, the market tends to have more players—particularly in countries with cheap fuel—and price movements are smoother. Some countries in Africa have recently sought to push into nitrogen production.
“Deposits of potash and phosphates happen to occur wherever God or nature wanted to place them,” Andres Santacruz, a fertilizer trader with the Russian mineral firm Acron Group, said in an interview with the Prospect. That helps explain why the nutrient mineral industry has typically been concentrated in a smaller number of hands. It has seen the rise and fall of cartels that have been compared to OPEC, the group of oil-producing states. Mosaic, a top supplier of potash and phosphate, now enjoys around 90 percent of U.S. market share, according to two analysts of the sector, granting it enviable pricing power.
Yet even in nitrogen—which can be produced without divine providence—consolidation in American production has been dramatic. One study by agricultural economists found that between the 1980s and the mid-2000s, the number of producers shrank from 46 to just 13.
What happened next is even more striking. Biofuel policy subsidized high corn production and the fracking boom kept gas prices low, an environmentally toxic brew that fed a takeoff in nitrogen fertilizer production. But even while domestic production grew, it continued to be concentrated in the hands of a shrinking set of companies. In 2019, four firms—Koch, CF Industries, Nutrien, and Yara-USA—represented three-quarters of total domestic nitrogen fertilizer production.
ENTERING THE SPRING PLANTING SEASON, farmers now face commercial fertilizer prices that are four to five times higher than they were last year. That could prompt some to cut back on production, despite the rally in food prices, or to shift toward crops that require less fertilizer, like soybeans. Lower production of fertilizer-intensive grains like corn—used in biofuels, animal feed, and a bevy of other products—could drive prices higher in other commodity classes.
Inventories were already tight entering 2021, after heavy winds called derechos pummeled the Corn Belt, raising demand for fertilizer to compensate for crop losses. Winter blasts of Arctic air sent natural gas prices soaring in the U.S. and Europe, prompting some producers to idle fertilizer plants. The same “La Niña” weather patterns hit Brazilian soy with droughts, further increasing fertilizer demand.
In the summer, Hurricane Ida ripped through the U.S. Delta region, which accounts for large amounts of nitrogen. Plants were mostly unharmed, but electricity came back on for residences first, causing a delay in nitrogen production. In December, fears of war in Ukraine sent prices higher. All told, by the end of 2021, global fertilizer prices had increased 80 percent.
As prices rose, several countries moved to protect domestic markets. China, the world’s top phosphate exporter, said in October that it would temporarily halt most exports. Phosphate is not only used in agriculture but also industrial consumption for chemicals, and the lithium-ion batteries used in electric vehicles. In November, Russia limited its own exports of nitrogen, citing the need to ensure supplies for local farmers.
Multiple energy-sector analysts interviewed by the Prospect argued that the restrictions were geared more at protecting domestic agribusiness than at military aims.
“It’s not that Russia is using fertilizers as a geopolitical weapon,” Santacruz said. “They decided to do this to protect their own agricultural output.”
Yet while China and Russia moved to shelter their domestic farm sectors, the U.S. moved in the opposite direction, restricting imports that help make fertilizer supply more competitive. Over farmer objections, the Commerce Department ruled in favor of U.S. fertilizer producers claiming imports were being “dumped,” or sold at less than fair value, into the U.S. market by countries including Russia, Morocco, and Trinidad and Tobago.
The cases were brought by CF Industries over the nitrogen compound urea ammonium nitrate (UAN), and by Mosaic, the biggest American fertilizer producer, over phosphate imports.
The phosphate ruling puts Mosaic in an extraordinarily favorable market position, Linville said. He estimates that Mosaic has their hand in 88 percent of the global phosphate production, either indirectly or directly.
That’s because, of the top phosphate-producing countries, most are out of the running in America. Russia and Morocco face countervailing duties, Brazil and India are major producers but don’t export, and China isn’t exporting now, either. Saudi Arabia can come to the U.S. market freely, but Mosaic has a substantial ownership stake in the Saudi Arabian phosphate market.
An analyst at Bloomberg Green Markets quoted a similar figure, pegging Mosaic’s market share at about 90 percent in October 2020.
A spokesperson for Mosaic disputed that assessment. In practice, he said, Mosaic supplies “about half” of the U.S. market, and “that share of the market has not changed meaningfully since the countervailing duties on Russian and Moroccan producers were imposed.”
Eighty-five members of Congress wrote to the International Trade Commission last week, arguing against duties on phosphate from Morocco and urging that the ITC suspend any imposition of new duties on fertilizer from Trinidad. (The letter delicately avoids mention of Russia, the world’s second-largest potash producer.)
Since the phosphate duties were imposed, the letter points out, phosphate fertilizer prices have increased by 93 percent. It stops short of alleging that companies are profiteering or taking advantage of current conditions, and points to factors in the price run-up including supply chain congestion, extreme weather, and inflation.
But as a result of surging prices, the lawmakers argue, “planting decisions are increasingly being made not on market fundamentals but rather on the cost of production driven by the price and supply of fertilizer.”
AS FERTILIZER PRICES HAVE RISEN, Mosaic has returned booming profits to investors. On an earnings call in February, executives emphasized that they are currently “prioritizing share repurchases over other uses of capital.” Last month, the firm entered an accelerated share repurchase agreement with Goldman Sachs, buying back $400 million of its own stock.
Beyond U.S. demand, Mosaic is bullish on India, where one executive said she is confident pent-up fertilizer demand will ensure that “the price level is going to stay at an elevated level.”
Asked about whether they could expect sustained high demand from that market, Mosaic CEO Joc O’Rourke pointed to the country’s acute worries over food security.
“This becomes more than a simple problem for a country like India with 700 people [sic] living in basic poverty and relying on the agricultural economy. The Modi government needs to be responsive … When it comes down to food security, they’re going to do what they have to do to make sure that works,” O’Rourke said. He pointed to the country’s “fast settlement” on a recent potash deal, and “their willingness to pay $930 or $920 for phosphates.”
Another North American fertilizer giant, Canada’s Nutrien, returned $2.1 billion to investors through dividends and share repurchases last year. Executives said in an earnings call that it expects to return at least $2 billion in share repurchases in 2022.
American farmers have cried foul over the price surge, pointing out that the prices of inputs like fertilizers and seeds, sold by monopolistic producers, frequently rise in tandem with higher crop prices and eat into their unpredictable profits.
Researchers from the University of Illinois found that due to rising input costs, farmers are projected to see less income in 2022 than in 2021 or 2020, despite elevated food prices.
Meanwhile, USDA Secretary Tom Vilsack announced a $250 million grant program to develop additional domestic fertilizer production. Farmers are largely unimpressed. The most recent nitrogen fertilizer plant, built in Iowa in 2017, cost $3 billion.
“It is peanuts,” said Gary Schnitkey, a professor in farm management at the University of Illinois. He argued that it is the best the USDA could do without going to Congress for authorization to spend more, but acknowledged, “it’s not going to alleviate the situation.”
Farm advocates like Joe Maxwell of the Family Farm Action Alliance have accused fertilizer producers of price-gouging for months. In a December letter to the Justice Department, Maxwell argued that companies raise the price of inputs like fertilizer when they anticipate rising food prices, squeezing farmers’ profits.
Other farm inputs like seeds and fuel are also getting more expensive—leading some farmers to rethink their plans for spring planting. If food exports come up short this year, the consequences will carry beyond American supermarket shelves. The World Food Program’s executive director has described a dynamic in grain markets that parallels the trend in fertilizer: Reserves were stretched thin even prior to the destabilizing Russian invasion. “Ukraine has only compounded a catastrophe on top of a catastrophe,” he told The New York Times.
Meanwhile, the evolving debate over whether to lift tariffs on foreign competitors could shed light on the balance of power between the U.S. farm lobby on one side, and petrochemical and natural gas firms on the other.
“I don’t really believe that it’s an agenda of the [U.S.] government to try to protect their own fertilizer producers. They can take care of themselves very well,” Santacruz, the Acron fertilizer trader, told the Prospect. “The U.S. is not protectionist. It’s the flagship of capitalism and they will keep their markets open.”
