War in Iran Is Creating a Fertilizer Crisis Like Never Before

17:06Tracy Alloway:What were the domino effects of that massive surge?

17:09Joe Weisenthal:Yes, so the 2022 price surge was really two supply side shocks. In 2021, China started their export ban on urea and phosphate fertilizers. And the importance of China to the fertilizer market, they really, it cannot be overstated. So China is the marginal producer for urea and phosphate. So generally speaking, when China is exporting fertilizers, prices globally will tend to fall. And when China is out of the market, prices rise to the next level of production costs. And so in September of 2021, when China slammed the door on exports, the world had really scrambled for alternatives to supply. And then when we had the Russian invasion into Ukraine in the first quarter of 2022, we saw fertilizer prices spike on top of that because the world was unclear about how we could source fertilizers from Russia.

18:12Joe Weisenthal:So Russia is a high volume exporter. They're a low cost producer. And Russia also is probably the really the only country that will do high volume exports of nitrogen, phosphate and potash. You name the flavor of fertilizer that you want, you can get it out of Russia. And so there was just this general surge in the industry to try to find an alternative. You know, and I mentioned earlier that when we took China out of the market, fertilizer prices had to go above the marginal producer level production costs in China and bid in new supply. And the way that the nitrogen cost curve is oriented, that meant the world had to go to Europe to find new sources of nitrogen and turn those plants on in order to meet demand.

19:01Joe Weisenthal:Well, at the time, the price for natural gas in Europe, which is the feedstock for ammonia and then eventually urea, was surging over$60 per MMBTU. And so if you wanted to run the economics of what it costs to make ammonia, it's a very easy back of the napkin math to do this. It takes about 34 to 36 MMBTUs of natural gas to produce one ton of ammonia. But if we needed 36 MMBTUs to make ammonia and I'm paying$60 for natural gas, I'm looking at an ammonia price that's over$2 ,100. So if I'm a farmer in the U.S. right now and I'm getting ready to plant spring weeds, what am I doing when I, you know, I'm, hopefully I have a Bloomberg terminal.

19:53Joe Weisenthal:That would be nice as a farmer. But I'm looking at the chart of the price spike in something like urea. What am I thinking to myself in terms of offsetting this cost? Yeah, so farmers will have probably four options or decisions that they can make at this point. And I will tell you, I do think that U.S. farmers are probably best poised to weather this storm compared to farmers in, let's say, the European Union or India at this point. If you're a farmer, what you can choose to do is you can reduce your application rates. You can switch what you're planting, let's say from corn to shifting to soybeans, which demands significantly less amounts of nitrogen.

20:38Joe Weisenthal:The third option is as a U.S. farmer, you can switch among your nitrogen products. And then the last worst option is just not plant at all.

20:48Tracy Alloway:And what do you see happening right now? Now, there was a headline, by the way, earlier that I saw where already senators in D.C. are hearing from farmers talking about wanting to get relief from wanting to get some sort of bailout. It's not as extreme, but, you know, the price is to some extent global. And so we see the New Orleans price that's shooting up, too. That's at 570 pounds a ton. Yeah.

21:13Joe Weisenthal:So this is really all, you know, as in economics, this is all really relative. So I want to just give some context as to why, even though Egypt urea is, I think today, close to$700, still about one third below the 22 price spike. What's happening now is probably the worst it's ever been for farmers looking to buy nitrogen. And we measure that in the industry by just looking at the urea price to the crop price ratio.

21:41Tracy Alloway:Oh, that makes sense.

21:43Joe Weisenthal:Yeah, it's all relative. You know, that last incremental ton of nitrogen is going to give you a yield bump. So you kind of want to run the economics and the agronomy on if I spend a little bit more on my nitrogen, am I going to get that yield bump? So I need to know what the price of the commodity is. And if I were today to look at the urea to corn price ratio.

22:06Tracy Alloway:Yeah.

22:06Joe Weisenthal:Last week it was at 124. The highest it's ever been is 143. And with the price surge that we're seeing again this week, I expect once we have prices settle on Friday, that we'll set a new record for the most expensive that urea has ever been to a corn farmer.

22:26Tracy Alloway:Tracy, this is going to make a good chart in the newsletter because I just charted it as our guest was talking about it. And yes, we are very close to that. So even though on the pure urea price, not necessarily at all-time highs, but relative to corn, we are very close to all-time highs there.

22:41Joe Weisenthal:Yeah, I think this is important. So the other thing I wanted to ask is you've heard, I mean, it's a running joke on the show that farmers are always complaining about something. But one of the things they've complained about is fertilizer prices, even before, you know, the Iran situation, even before the 2022 price spike, there's been some grumbling. What's going on in the structure of the market that seems to make fertilizer prices an issue for the farming industry? So the farming industry in the U.S. right now is margins are incredibly thin. If we look at, for example, the difference between what farmers pay for their inputs versus the prices that they get for their agriculture products, it hit a record negative spread in January.

23:33Joe Weisenthal:There's a lot of price pain out there in the U.S. farm economy, and we're seeing Chapter 12 bankruptcies. Chapter 12 is a specialized form of bankruptcy for farms and fisheries starting to pick up here in 2025. So I'll say the economic pain is real. And if you look at fertilizer prices, they tend to cycle just like all other commodities. The last time we really saw an amplified price cycle for fertilizer was 07 and 08, kind of in line with the financial crisis. But what makes this different is in contrast to, I think it was more of a demand cycle in 07 and 08 that caused the amplification. But this time, this is a supply side crisis.

24:17Joe Weisenthal:You know, I think about this as like a three-legged stool. We've taken China out of the market. Russian supply seemed difficult to acquire. And now you throw in, we have this global choke point for urea in the Strait of Hormuz where almost, let's say, 40 % of the nitrogen that we need is you can't get it. Those are the supply side drivers that are keeping fertilizer prices at mid-cycle level for much longer than many in the industry would have expected when this started in 2020, 2021. want. When you say you can't get it, do you foresee a situation where you can't get it at any price, basically?

24:59Joe Weisenthal:Oh, Tracy, my econ professor would roll over in his grave if I ever said that. But I'll just kick it back to, you know, applying fertilizer, you know, you have to do it when the crop wants it. So that's really pre-planting and during like early emergence of your crop. It's, Having a kid and needing to feed them vitamins at a certain point as they start to grow. That's right. Everyone knows after they're three years old, you don't have to feed them anymore. They fend for themselves.

25:30Tracy Alloway:They're good at that point.

25:32Joe Weisenthal:You're on your own. Go fix me a hot dog. Yeah. So if you miss the urea application window, it's really difficult to go back or nearly impossible to go back and apply nitrogen. You just will have to take the yield penalty.

25:47Tracy Alloway:Yeah, it's interesting, you know, again, just looking at the pure urea chart, you mentioned, you know, some of the legs of the stool have already been kicked out. So the lowest it got after the invasion of Ukraine was still not anywhere close to, say, pre-Ukraine or pre-pandemic levels at all. So we've shifted into a higher regime generally, even before the war in Iran. So when we're talking about oil markets, we know that there's infrastructure that's already been destroyed. So even if the Strait of Hormuz is opened in short time, there's infrastructure that's been damaged. And of course, we know wells have been shut in because they're running out of storage space for oil.

26:27Tracy Alloway:What do we know about the fertilizer infrastructure period? You know, the damage that's been done. And so, like, you know, say there's a miracle and suddenly things started flowing through the Strait of Hormuz immediately tomorrow, which doesn't seem very likely. What do we know just about the condition of the infrastructure and how long it would take things to get moving again?

26:49Joe Weisenthal:Yeah, that's a great question. I think we'd be looking at least two weeks before you'd start to see fertilizer come out along the Strait again. We haven't seen much in the way of these facilities being attacked directly. And so a lot of the manufacturing sites have shut down preemptively. And so then to restart a fertilizer facility, it's going to take two or three days of a natural gas burn just to get the plant to where it is producing urea again. And then you have to bring a vessel in. You have to load the vessel. You have to get it back out. And nobody at this point has any clarity on when the strait reopens.

27:31Joe Weisenthal:Who gets first priority? Is it oil or is it fertilizer? I'm just going to guess oil. We'll get the priority. So, you know, once this has a clear end date, at least two to three weeks before we see fertilizer come back out of the nose.

27:57We'll see you next time.

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30:06Joe Weisenthal:So obviously everything is still in flux and I should just add our standard disclaimer, which is we are recording this on March 10th and who knows what will happen by the time this episode comes out. But how do you anticipate this actually feeding into food prices? I mean, this is the big question. So people use less fertilizer. You get lower yields. Supply goes down. I assume prices go up. Or you have farmers that continue to use fertilizer, but it costs them a lot more. And so they have to offset it with higher prices, and prices still go up. Yeah, I'll think about this in sort of a time frame of when we might start to see some of this flow through the system.

30:48Joe Weisenthal:It's the relationship between fertilizer prices and when that piece of food arrives on your dinner plate. There's a lot of decisions and price inputs to how that all works. But so what we're thinking right now is we'll see that, in fact, the market's calling for a reduction of nitrogen application rates here in the U.S. And so I'm looking at what I might expect for U.S. corn yields to be this year. Last year, we had a yield of 186 bushels per acre. I'm thinking at this point that we could see the U.S. corn yield be 182 bushels. But again, we still have a long road of production potential ahead of us.

31:30A lot of the corn yield depends on what the weather looks like during the summer season,

31:35Joe Weisenthal:how soon farmers can get out there and plant. And then also, you know, the thing about commodity prices is they'll snap up and then at these levels, you know, I mentioned earlier, this is a record. We were expecting to see a record urea to corn price ratio that will destroy a lot of urea demand. And so if the strait reopened next week, you would see urea prices sort of snap back to before. Maybe you would see them snap back to where they were before this war. So thinking about food production and the relationship with this. So we're planting now in the spring. I'm expecting lower yields for corn, for example.

32:19Joe Weisenthal:That corn isn't going to get harvested until probably about September or October of this year. And then it'll have to move to, let's say, a milling location or an ethanol plant. Lower yields is going to be something that'll move through the food production system over a time span of about a year or two. All right, Alexis, thank you so much for coming on All Thoughts and finally letting us talk fertilizer. I wish it was under better circumstances, but this was absolutely fascinating. Thank you. Thank you for having me. It was my pleasure.

33:06Joe Weisenthal:Joe, I'm never going to look at one of those little packets that comes with flowers, fresh flowers, the same way again.

33:11Tracy Alloway:No, I never used those. No, maybe I put them in the water. I had no idea. But no, that was super interesting. And the money chart for me was really seeing that urea to corn futures ratio, which is very clean and very elegant. And you can just see farmers are how much stress they're already feeling and then how much additional stress they're seeing just in the last weeks. But there haven't really been good conditions for fertilizer costs really since the pandemic. It has seemed like, in particular since the war in Ukraine started, the structural shift in supply. Yeah.

33:46Joe Weisenthal:So there are a few things that stood out to me. So number one, tough times for farmers. And it seems like in all these instances, the pain usually falls on the smaller scale farmers versus the big ones. I imagine in this particular situation, if you're a huge farmer out in Iowa or wherever, you probably have enough scale to ensure that you're still getting some sort of fertilizer. those business relationships are going to help you versus say a small scale farmer who's like making these decisions on an individual basis the other thing that stood out to me and we've heard this before in our oil discussion with rory johnston this idea that well again the big fare better so the u.s is probably going to make it out better than say in india which means nat gas from the middle east in order to make its own fertilizer and then the other thing that stood out to me was that idea of storage.

34:42Joe Weisenthal:So we know that in commodities, storing something can cost a lot of money. And it seems like fertilizer in particular hasn't really been stored in the way maybe some other metals have been because most of the time you only need it, I guess, twice a year, once in the Southern Hemisphere and once in the Northern Hemisphere.

35:01Tracy Alloway:Yeah. It does not seem as though the supply chain has been optimized for sort of long-term accumulation there aren't strategic urea reserves the way there are with other commodity reserves it's really going to be a mess and you know that was when we talked to rory johnston about energy and you know again in the u.s it's going to show up mostly at higher prices in the pump elsewhere it's going to show up as literally an unavailability a reduction in the amount of energy the amount of oil that's capable it's really disturbing to think like yeah i mean no one wants to pay higher groceries, but it's a lot better than outright famine, which is the risk when you do such a massive shock to food supply.

35:42Joe Weisenthal:Yeah. All right. Shall we leave it there?

35:43Tracy Alloway:Let's leave it there.

35:44Joe Weisenthal:This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

35:49Tracy Alloway:And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Kerman Rodriguez at Kerman Armand, Dash O 'Bennett at Dashbot, and Kale Brooks at Kale Brooks. And for more Odd Lots content, go to Bloomberg.com slash Odd Lots. We have a daily newsletter and all of our episodes. And you can chat about all these topics 24 seven in our discord, discord.gg slash odd lots.

36:09Joe Weisenthal:And if you enjoy odd lots, if you like it when we talk fertilizer, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple podcasts and follow the instructions there. Thanks for listening.

36:58This is Caroline Hyde.

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