Nitrogen Fertilizer Market Overview
Signs of a bottom forming in the NOLA cash trade, and the spring rush ahead, make this a good time to be shopping around and paying attention to local fertilizer market dynamics.
The purpose of this research report is to start laying the foundation for valuing fertilizer applications in the years ahead. There are many new ways to reduce application rates and methods, with financial incentives available to offset the costs, but it’s still scary – and risky.
In conventional farming systems, there can be a 1:1 reduction in yield for every pound of nitrogen that a grain producer scrimps on. It takes real knowledge of chemistry and biology to make the substitutions properly, and then there are still the purchase and pricing decisions to manage.
As with all agricultural commodities, the drivers of local fertilizer prices are global supply and demand, logistics, farm profitability and trade policies. And because nitrogen fertilizer is a massive emitter of greenhouse gases, the economics of carbon offsets play a factor now too.
Author’s Note: The premise of this research series is that land management including seeding decisions are going to be driven by a lot more than relative returns going forward. Any entity that relies solely on the grain markets to allocate seeded acres efficiently won’t be able to any longer.
Stay tuned for a report on carbon and biodiversity markets next week, and a recap of pulse crop markets. These two variables will factor into planting decisions in an increasing manner in the years ahead.
Structural Background of the Nitrogen Fertilizer Market
Nitrogen fertilizer is very much a global market. The main world producers are China, the U.S., India, Russia, Indonesia, Egypt, and Canada. Depending on the time of year and relative prices, some of these countries may be importers as well as exporters of nitrogen fertilizer. Production and shipping logistics can limit arbitrage.
Natural gas is an essential element for most nitrogen fertilizers, therefore gas prices directly factor in to the cost of N production and as such, the two markets are closely correlated. Ammonia is the starting point for producing granulated urea and liquid UAN, which draws the three main forms of nitrogen fertilizer into a correlated trading relationship, although the spreads are not fixed and can fluctuate quite a bit in cash markets.
The pricing chain starts with the futures (natural gas, UAN, and urea trade on various exchanges), and converts through production to arrive at a wholesale price from a plant. Intermediaries purchase and resell raw fertilizer products (urea, ammonia, UAN) to retailers that can store, blend, and re-distribute it in a form that is ready for a farmer to apply to a field.
The cash market backoff for North American fertilizer pricing is NOLA (New Orleans, Louisiana), the primary trading hub of imports and exports. There are two basic factors that influence the difference between NOLA and local Canadian Prairie pricing: the currency, and supply chain fluidity.
The three main forms of nitrogen fertilizer are granular urea, liquid UAN, and anhydrous ammonia. This report will focus on the price of granular urea, which for budgeting purposes is trading in the range of C$900-1000 across southern Manitoba currently.
Nitrogen fertilizer prices are both volatile and variable, meaning there will often be a big difference between the highest and lowest price every day. This is especially true during times of major market moves, and this is one of them.
2023 Outlook
After a spike higher fueled by the Russian invasion of Ukraine, fertilizer prices peaked last fall, on the backs of extremely high natural gas prices in Europe that forced plants to shut down. Once the manufacturers in Europe were able to arrange and take delivery of imported LNG from non-Russian suppliers, prices eased allowing some plants to come back on line. Then the winter temperatures were warmer than expected across Europe, weighing on demand and further pressuring natural gas prices, which in turn improved margins in fertilizer manufacturing, boosting production.
Benchmark futures pricing in North American markets has plunged accordingly, however cash market declines for fertilizer have been less. Supply chain problems are the main factor, since late last fall when barge traffic was constrained along the Mississippi. Movement northward along the river has improved in the past two months, but that’s not long enough to alleviate the backlog.
By summer will be though. Following the spring rush, fertilizer markets tend to go very quiet in the summer. This is often the most advantageous time of year to buy, for farmers with the ability to store product on farm - although it didn’t work out that way in 2022.
Since farmers mostly purchase fertilizer as they need it, i.e. at the time of application, the planting season sees the majority of annual retail sales. Product is being shipped into position now to build up local inventories. Shortages are unlikely.
Increased supplies, both globally, across North America, and in local retail channels, could still pressure fertilizer prices below current retail offers before spring. Shipping channels are opening up and margins are better on crop inputs than grain, so companies should be getting more aggressive in lining up farmers’ business in the weeks ahead. That being said, the NOLA market has been showing signs of bottoming in recent days – barge trading has picked up with some traders going long at current levels.