“Events that happen halfway around the world matter to you,” stated Josh Linville at the 99th USDA Agricultural Outlook Forum with the “you” being U.S. farmers and those who work with those farmers. The big event that unsettled fertilizer markets of course was Russia’s invasion of Ukraine. That February 2022 event had a dramatic impact on natural gas markets as Russia accounts for about 13% of the world’s production. Specific to the European Union, Russia had supplied 45% of the 27-country block’s natural gas needs.

“It was Russia’s decision to stop exporting natural gas to Europe that dramatically impacted the nitrogen market,” said the vice president of fertilizer at StoneX. “Even though western Europe accounts for only 5% of the urea projection, it’s 5% of a really, really big number is still a really big number!” continued Linville in discussing the connection between nitrogen and natural gas. “In Europe’s case, 5% of a 224 million ton per year global market is 11 million tons. We saw European production drop all the way down to 20% to 30% of normal. It’s since returned to 60% to 65%,” he continued at the Arlington, Va., event. “That’s created a big shortfall in the world market.”

Natural gas prices, and thus the impact on nitrogen-based fertilizers, have moderated to some extent since Russia’s invasion of its western neighbor.

“The reason that natural gas prices came down is because Europe had a warmer winter than normal, consumers did their part to use less, and industrial demand went down,” he said of the situation in Europe.

What about fertilizer prices?

“When it comes to UAN (Urea Ammonium Nitrate) prices, there are two things we are watching — No. 1 is Russia. No. 2 is Europe,” said Linville, who grew up on a northwestern Missouri family cattle and crop farm.

“Europe is really important when it comes to UAN fertilizer production and it’s under pressure due to the high costs of natural gas. When you look at it, one out of every five tons of UAN produced in the world comes from Europe,” explained Linville. “So, you better watch Europe and what’s going on there because it’s going to matter to every farmer around the world that uses UAN,” he said to the audience.

“Russia is only 9% of the capacity. Who cares?” he asked rhetorically.

“We need to care because one out of every 3 tons of UAN exported around the world comes from Russia. Those are very important things we need to watch because those are setting the price in marketplaces,” he said. “Russia has been very successful in continuing to export its urea because it’s easier to transport,” he said, explaining that isn’t the case for UAN.

It's the world leader

“Anhydrous is the base of nitrogen. Why does Russia matter?” Linville once again asked rhetorically.

“They are the No. 1 exporter in the world at 4.4 million tons in a normal year. Second is Trinidad and Tobago at 3.3 million tons,” shared the 20-year market veteran who has worked at companies in the fertilizer markets.

“Anhydrous exports have gone very, very low because the product is produced in Russia and piped through Ukraine and out to seaports. Are you going to run anhydrous through a pipeline in a war zone?” he asked. “Absolutely not!”

“What’s happened as Russia has lost gained territory to Ukraine? As they fall back, Russian troops have destroyed infrastructure,” he said. “When it comes to this important transport pipeline, we are not talking 10 to 20 miles, it covers a long distance and you must have pump plants to keep product moving,” stated Linville. “As Russian troops have retreated, they have destroyed the electrical grid. Without electricity, you cannot run the pumps. Without the pumps, you cannot run the pipeline,” he explained of nitrogen fertilizer’s continued woes.

“After March 2022, Russian exports of anhydrous have come to a standstill. It’s the No. 1 exporting country in the world and exports have largely stopped,” he said, doubling down on the nitrogen narrative as it relates to UAN.

“Factors halfway around the world indeed matter to us at home. What are some farmers doing in the U.S.?” he asked the audience.

“The urea price remains significantly discounted when compared to UAN. If I am a farmer using UAN, and I’ve seen UAN at a high price and urea is at a steep discount . . . I am switching my practices. I’ll go out and buy a spreader and have my retailer put it on my equipment,” he shared of the economic realities.

“Remember, anhydrous people generally don’t switch. However, I’ve had anhydrous people tell me the same thing. ‘Anhydrous is too high, I’m switching to urea,’” said Linville of this unique dynamic unfolding among U.S. crop farmers.

“This is a situation we have to watch as we move forward. Are we going to see even more demand this spring as this switch to urea takes place?” he asked.

“The U.S. is a net importer on urea. We expect that we need to import 5.1 million tons. That is based on normal demand,” Linville went on to say. What might this switch between UAN to urea and anhydrous to UAN cause in the marketplace?

“It takes 30 days to move a vessel from the Arab Gulf to the U.S. It takes another two to four weeks to move that product from the Gulf of Mexico to where you need it in the Midwest,” he said, concluding that unfilled demand could move market prices quickly.

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(c) Hoard's Dairyman Intel 2023
April 13, 2023

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