February Fertilizer Market Update
This report has 2 parts. First, rural cash markets for nitrogen fertilizer are reviewed. Second, new biological fertilizer products and green ammonia processes are explained.
Part I. N Prices in 2023
Almost all commodity futures have fallen sharply since the peaks of last summer, keeping steady pressure on local values for everything from diesel to grains. Cash fertilizer prices at country retail locations have come down in the past month, in step with further declines in NOLA (U.S. Gulf port) pricing.
There are a number of reasons for grain producers to lock in 2023 fertilizer prices at this time. Bullish influences on the pricing of N currently include:
Margins on grain production at today’s nitrogen values are attractive.
For about the past month, the trade has been speculating that the bottoms were nearing in the NOLA (New Orleans, Louisiana) urea market. Cash buying has picked up recently as traders start to build speculative long positions.
The U.S. is at a discount to other origins currently, drawing in new offshore buying interest. A long-awaited Indian tender has recently been announced.
With the planting season just around the corner in the U.S., the window is closing for cash prices to drop further before the big spring demand window is here.
Yet, as with every pricing decision, it’s impossible to know precisely the best timing. Here are the bearish influences, i.e. some reasons why local fertilizer prices could drop further in the weeks ahead:
The Indian tender did not have the anticipated stabilizing impact on the NOLA urea trade this week. The shipping window is 90 days for this tender, compared to the normal 30-40 days, which creates less urgency to cover in purchasing to fulfill sales quickly. Rather than running higher, prices have fallen since the tender was announced.
Currently there are no issues limiting access to the transportation capacity needed for local inventories to be filled heading into spring. There are no concerns about available supplies in 2023, as there have been in recent years.
Tactics for Purchasing N:
The spread between NOLA and local cash prices is highly variable, because of different purchasing models used by the companies that sell N to farmers.
Bigger retails with storage capacity will have purchased inventories at higher prices previously, and will continue to show higher prices to farmers until they need to reload. This is called ‘first-in-first-out’ inventory pricing.
Fertilizer merchants that use live pricing are going to be more competitive in a falling market, and less competitive when nitrogen fertilizer prices are on the rise. This is called ‘back-to-back’ pricing – and it’s the same way price discovery happens with grain.
The spreads between urea, UAN, and anhydrous ammonia are somewhat abnormal currently due to storage and equipment limitations. Urea is the most liquid market for nitrogen fertilizer, it’s the easiest product to handle, it’s currently the most competitively priced source of N on the market, and none of this is likely to shift much in 2023. UAN and anhydrous are showing greater-than-normal premiums to urea throughout North American supply chains.
Part II. Biologicals and Green Ammonia
There is a lot of talk and action in startup and investor circles currently around new products and processes for replacing the use of (and pollution from) fossil-fuel-based chemical fertilizers. These fall into two basic categories:
Biological products that partially substitute chemical bulk nitrogen products; and
Green ammonia, which is the same product that farmers are used to applying, manufactured without greenhouse gas (GHG) emissions.
Biologicals
Biology-based fertilizers are made up of certain strains of microbes (bacteria, fungi) that are known to react with molecules in the soil to release nutrients to feed crops. There are more commercial biological products on the market in the U.S. currently than there are in Canada because of different regulatory approval processes.
There are many solid examples of biologicals effectively displacing chemical fertilizers without any sacrifice of the crop’s yield, but the results are inconsistent. Biological and chemical fertilizer tools are structured to perform quite differently – the former is environment-dependent, and the latter works consistently across a field.
Therefore, biologicals run into unique challenges to adopt with practical success. First, farms might not have the right equipment use them in a timely manner, and furthermore the wholesale and retail supply chains might not either, because of their shorter shelf life. Second, the practice of applying biologicals requires shorter windows, greater frequency, and unique tank mixes that farmers may not be familiar with.
Put another way, when it comes to solving the problem of chemical fertilizer’s deep environmental footprint, biologicals are an ‘incomplete solution’. Once digital mapping is available that can demonstrate across a field where the microbial strains will survive and complete the release of nutrients effectively to the crop, these products will be able to benefit from precision farming technology to find increased and more consistent rates of success.
Green Ammonia
The chemistry involved in fertilizer manufacturing has always been heavily reliant on fossil fuels. The di-nitrogen bond that holds together atmospheric N is highly stable and strong, and takes tremendous energy to break so that it can be reformed into ammonia.
Thus, natural gas (LNG) became the primary input in nitrogen fertilizer production. By contrast, green ammonia uses renewable energy (electric and solar) to accomplish the same process. There are other energy alternatives to LNG for manufacturing on a commercial scale (such as microwave, and others), but the greatest promise for green ammonia today, from a GHG-reduction standpoint, looks to be with replicated small-scale renewable-driven manufacturing.
When it comes down to calculating the full life-cycle of emissions related to fertilizer use, it’s not just a problem of nitrous oxide and fossil fuels. Bulk fertilizer is a global trade, and shipments are moved massive distances around the world from manufacturing plants to farms. The supply chain is very expensive and dangerous to manage.
There are several additional benefits to green ammonia compared to conventional nitrogen fertilizer, one being the pricing. The price of the inputs – air, water, and renewable energy – are considerably more stable than LNG, which will translate into a more consistent price to farmers. Developing small-chain regional green ammonia production would also remove several factors that contribute global market volatility and uncertainty to fertilizer prices: logistics and currency fluctuations.
Big thanks to podcast hosts Tim Hammerich and Sarah Nolet for their excellent coverage of this exciting new sector.
To learn more, listen here:
https://tenacious.ventures/podcast-episodes/future-of-fertilizer-so-what-with-tim-hammerich-from-future-of-ag?utm_source=substack&utm_medium=email