There’s no good time for a squeeze in supplies, but for it to happen in the Northern Hemisphere’s planting season is particularly unhelpful.
It was always a certainty that serious trouble in the Gulf was going to mean a squeeze on fertilizer supplies, and thus prices. Natural gas is a key element in the production of nitrogen-based fertilizers. It is the primary feedstock for ammonia, the building block for all nitrogen fertilizers, and accounts for 70–90 percent of production costs. Unsurprisingly, Middle Eastern gas producers looking to move up the value chain have become major producers of fertilizers and typically now account for perhaps a third of global exports.
There would never be a good time for a squeeze in supplies, but for it to happen in the Northern Hemisphere’s planting season is particularly unhelpful, and, sure enough, a reduction in supplies and a corresponding increase in prices are hurting farmers at exactly the wrong time. This may/will in turn affect food prices as farmers try to pass on the increased costs and, in all probability, also reduce their planting, hitting future supply. Efforts by fertilizer producers elsewhere to make up for some of the shortfall will be hampered by the difficulty or the expense that they face in getting hold of more gas.
The New York Times reports:
Many American farmers, who had already seen their margins squeezed by tariff shocks and labor shortages, have purchased fertilizer for the season, but those who haven’t may be hit with higher prices. The United States is a major fertilizer producer globally, but it still imports more fertilizer than it exports, including from Canada, Russia and Qatar.
In an effort to help alleviate the price increases, the Trump administration has lifted sanctions on fertilizer sales from Belarus and Venezuela. Farming groups have been pushing for more, including the revocation of duties on phosphate fertilizer from Morocco and Russia.
Of course, American farmers are helped in this respect by the dramatic increase in domestic gas supplies on the back of fracking.
The Iran war, which has seen 20% of global LNG supply blocked behind the Strait of Hormuz, changed the equation. U.S. gas prices have barely budged from $3 per mmBtu, thanks to ample domestic supplies, while European TTF prices have surged to $18 per mmBtu. Asian ones, on the Japan-Korea Marker (JKM), are even higher.
(As a reminder, Elizabeth Warren, forever at war with affordability, promised in 2020 to ban fracking “everywhere” if elected president).
Meanwhile, Russia may be looking to use the advantage given to it by its strong position in fertilizer production.
Due to shipping disruptions in the Strait of Hormuz in early to mid-March, global commodities such as energy and fertilizers are already facing supply shortages. On Tuesday, Russia, a major global fertilizer exporter, announced a temporary one-month suspension of ammonium nitrate exports, further exacerbating the global fertilizer supply crunch.
Russia controls approximately 40% of the global ammonium nitrate trade. The export suspension, which will last until April 21, is primarily aimed at ensuring domestic fertilizer supply for the spring planting season. The Russian Ministry of Agriculture stated that it has halted all issued ammonium nitrate export permits and will not issue new ones, with exceptions for government contract-related permits.
Part of this will reflect Moscow’s determination to ensure that its farmers have what they need (Russia’s production capacity has felt the impact of Ukrainian attacks on one core nitrogen fertilizer producer, Dorogobuzh PJSC, which will probably be out of operation until May). But part, I suspect, will be because the Kremlin has seen the opportunity to squeeze fertilizer supply yet more as a way to give Tehran a helping hand.