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Mike Howell (00:08):
The Dirt with me, Mike Howell, an eKonomics podcast where I present the down and dirty agronomic science to help grow crops and bottom lines. Inspired by ekonomics.com, farming’s go-to informational resource, I’m here to break down the latest crop nutrition research, news and issues helping farmers make better business decisions through actionable insights. Let’s dig in.
(00:38)
Welcome back to The Dirt, everyone. Glad you’re tuning in with us again today. We’ve got a familiar guest on the program. We’ve got Mark Tully that’s joining us back again. Mark, if you will, remind our listeners a little bit about yourself and tell them what you do.
Mark Tully (00:51):
Good morning, Mike. Mark Tully here. Work at Nutrien, been here for seven years now and I’m our Manager of Global Market Research. I would say a funky title for all things eKonomics, covering fertilizer eKonomics, crop commodity eKonomics, and global macro eKonomics for the organization.
Mike Howell (01:07):
You know Mark, I took a few eKonomics classes when I was in college and the very first class I ever took, I walked in and the guy opened his textbook up and he said, “Boys, I’m going to tell y’all something. eKonomics is nothing but common sense made as hard as possible”, so I’ve followed that along and it seems like that’s the way it is a lot of times.
Mark Tully (01:26):
I would agree with you, although it seems like for the last couple of years common sense has been a little less available in terms of guessing where these markets are going.
Mike Howell (01:36):
That’s right. Mark, we first had you on a little over a year ago and I realized the other day that we haven’t had you on in a while. It’s definitely time we get some updates, but in one of our very first podcasts we had you on, the war in Ukraine, it just got started and we talked about we needed that to end as soon as possible and talked about some scenarios that were going to affect fertilizer prices. Obviously that’s still going on and doesn’t look like there’s an end in sight to that. How is that affecting things these days and is that still a major concern for us in the fertilizer world?
Mark Tully (02:08):
Absolutely, Mike. I think without a doubt, first and foremost the crisis continues and I think to a large extent it’s only escalated since the last time we’ve spoken and certainly since the first time we spoke over a year ago. The area that Russia’s taken in Ukraine has expanded. There continues to be reduced expectations for production and crop yields out of Ukraine and reduced exports year over year as moving through the balance of 2023 compared to 2022, and in 2022 exports and production were down like 40% versus normal levels. As you can imagine, we’ll probably see a crop that’s less than half its normal size coming from the Ukraine in 2023. With that war in Ukraine, we saw a number of pretty significant global trade impacts to the world and so most of the western world sanctioned Russia and those sanctions impacted their ability to transact product that they export globally.
(03:12)
The key products in our sector being both crop commodities of wheat being the major one and fertilizers and Russia is a major exporter of potash, nitrogen and phosphate fertilizers globally and since the war has begun, we’ve seen reduced exports in all of those three streams. I think the last piece of this puzzle is Belarus and although Belarus isn’t directly involved in the engagement between Ukraine and Russia, they’re also facing significant sanctions due to the actions of the Lukashenko government and they’ve lost their ability to export potash through the western port in Lithuania of Klaipėda and so now they’ve been forced to reshuffle their entire logistics stream and ship their potash out of Russia and as a result their shipments are down very significantly in 2022, and as we expect that to continue through the balance of this year as well and potentially for many years to come, and so all combined, what we’ve seen is a fairly material shortage from the former Soviet Union in terms of their exports as a result of the war in Ukraine.
Mike Howell (04:25):
Mark, we appreciate that update. From what you’re saying there it sounds like there’s going to be quite a lack of nutrients and goods coming out of that area and we know that’s a large producer of these commodities that seems like it’s going to drive prices higher, but fortunately for growers right now looking at fertilizer prices and reports that I’m seeing, it looks like prices are down versus the same time last year. With the supply shortage you just talked about why are prices coming down compared to last year?
Mark Tully (04:52):
Mike, not just down but to start 2023, we’ve seen the largest percentile decline in fertilizer prices really in history. Prices have pretty much halved from where they were a year ago. If you remember at this time last year we were talking about Brazilian potash that had four figures in the price tag. Today it’s trading under $450. Regardless of the product, we’ve seen a pretty significant decline in pricing and to your point, what’s been driving this very steep decline in pricing because on the one side of the supply demand balance, supply is still tight. We still have significant constraints around the world and maybe I’ll quickly just highlight what those are and then we’ll dive into I think what’s the bigger story is the demand drivers that have impacted price the most. But when we think about supply, so on potash, we touched on it earlier, we have reduced shipments from Russia and Belarus that account for about 40% of global exports today or pre-war, excuse me, so that’s a very significant supply constraint.
(06:00)
When we look at phosphates, Chinese export restrictions still exist. That’s where we saw tightness in the global marketplace from a phosphate perspective. There were some, I would say less material challenges for Russia and getting their phosphate exports out, but overall the Chinese export restrictions would be the big supply side challenge in phosphates and then in nitrogen, a couple of pretty major ones mostly in the ammonia product line. With the higher natural gas prices in Europe, which are a bit of a fallout from the war in Ukraine, we’ve seen significant curtailments of European ammonia production as well as downstream nitrate and urea production, but ammonia capacity is 40% curtailed in Europe today. Additionally, Russian ammonia exports are significantly constrained because most of them came through pipeline through Ukraine and then went through the Black Sea and that outlet is no longer available for Russia as the war continues.
(07:00)
Those are the big supply constraints that we’re seeing in the marketplace today and they’re significant and a material amount of product is just not available versus pre-war or pre Ukraine, Russia conflict levels. That’s why we should see higher prices. But then we flip to the demand side and I think that’s the big driver where ultimately we’ve had some sizeable demand offsets that’s allowed prices to come down quite a ways. And I think the first one is a shift in how buyers are behaving in the marketplace. So if we go back a year ago when all of these supply constraints started to become recognizable as the war began between Russia and Ukraine, we saw buyers all around the world really start to engage with the marketplace and inventory themselves for the next season, by way more product than they normally do. A great example of that would be Brazilian potash shipments in the first half of 2022.
(08:01)
A lot of buying or record levels of buying in the first half of 2022, but then as we got to the second half of the year, we saw those buyers pull back significantly and we’ve seen the buyer mentality, I think, shift to they’re going to buy the product just in time. Another great example of that is what we saw this spring in North America. Prices were down quite a ways, particularly when we look at the nitrogen complex in North America ahead of this spring season when we were looking at February and March, but we’ve seen a pretty significant spike in NOLA pricing ahead of spring as we recognized that supply was reasonably tight in North America, but buyers were waiting until really that just in time need until we saw field work beginning and growers really needing that product to step into the marketplace and buy.
(08:53)
And so that ability to push out demand has reduced, I think, the feeling of those supply constraints globally. Today I think the inventory levels have declined as a result of that buying behavior in this new growing season. I think we’ll have to start to see different markets re-engage as their season becomes apparent and we might start to see some of those price stability or price appreciations occur like we saw in North America this spring, but I think what’s very clear is that while these supply constraints exist, that there’s going to have to be some demand offsets in the marketplace to account for that and it’s had a pricing impact.
Mike Howell (09:38):
Mark, one thing you mentioned there was just in time buying, and that’s something that we’ve been talking a lot about amongst our sales group. These buyers are just waiting until the last minute to do that. Now I understand why they’re doing that. With these high prices they want to see where the market’s going and try to get the best possible price they can, but that also leads to some other problems. This product all has to be shipped somewhere and we have a lot of constraints trying to ship all the product at one time. Can you elaborate on that a little bit?
Mark Tully (10:05):
Yeah. Absolutely. Without a doubt I think that just in time buying is a function of those high prices in the marketplace and nobody wants to catch a falling knife. As we see those prices decline in the marketplace, it’s tough for anybody to convince themselves to step in immediately when maybe tomorrow they could get a cheaper valuation. That just in time buying really has been a function of let’s wait until the last possible minute for us to get ourselves engaged in the marketplace and hopefully at that time we’ll get the best possible price. But you’re right, I think that does potentially result in some risks when it comes to logistical constraints in the market and getting that product positioned and so particularly right now we’re seeing it a bit this season in the spring season in North America. We didn’t import normal volumes of nitrogen products or phosphate products this fertilizer year into the US. Both product lines are down significantly year over year or fertilizer year over year from a trade perspective.
(11:08)
And in fact, the export import balance is somewhat flipped. The US has exported a tonne of product into the marketplace while really not importing normal volumes. The supply demand balance tightened pretty notably, particularly for urea in the US and as well for DAP. Both of those products we’ve seen hold a pretty significant premium in pricing this spring as a result of that. And so what we’ve seen is as we’ve moved into April and into the start of May here, a real effort to purchase those prompt barges at NOLA and try and move them into position for the spring, but we’ve had some immediate challenges.
(11:47)
The upper Mississippi flooded, right, and that got closed and so there’s some challenges moving product into position in certainly the most northern parts of the Mississippi. Additionally, because we’ve waited, there’s a timing constraint on what ships can actually be directed to NOLA in time to make it for spring, and so those are examples I think of that just in time buying potentially prohibiting supply from reaching its normal level because we did wait later into the season to engage.
(12:22)
I think that the North American supply chain is one that’s quite mature and prepared to take on this challenge and overall I would hope that the marketplace is able to digest or do some switching from a product perspective to be able to meet this in season demand as I think growers expand acreage this year and look to maximize production, but as we look ahead to other regions around the world that maybe don’t have the same logistical network that North America has, that just in time buying could certainly be a risk in their seasons as well.
Mike Howell (12:57):
Mark, when I look at these prices, we talked about them this year being about half of what they were last year overall, but when we look at a 10-year average, it looks like we’re still seeing a little bit of elevated prices and we can’t turn the television on these days without hearing talk about inflation and we sure can’t go to the grocery store without seeing the inflation in prices. How much of this is still the market has to equivalate back to where it’s supposed to be and how much of this is due to inflation that we’re seeing?
Mark Tully (13:24):
It’s a great question. I think when we think of inflation in particularly the fertilizer sector, there’s a couple of things I’d probably point to rather than this just being global macroeconomic inflation that’s keeping fertilizer prices elevated and the immediate thing I would point to is the supply constraints in the marketplace. We have not put ourselves in a position yet globally where across a number of these nutrient streams we’re going to be able to supply the marketplace with normal volumes compared to history. If we look at potash as an example, in 2021 pre-war, total market shipments were about 70.1 million tonnes. Last year they were about 61.1 million tonnes.
(14:09)
This year we think it’s going to range between 63 and 67 million tonnes and we don’t think it can get back to normal volumes because the marketplace remains supply constrained from producers in the former Soviet Union. That’s an example where, in my mind, it’s less an inflationary experience in the pricing as much as it is there’s more demand in the world than there is supply availability, and so that product is going to drive a premium relative to history as a result of that supply demand tightness that exists.
(14:44)
When we look at nitrogen, again, particularly for ammonia, that’s going to probably have some supply tightness. When we look at the 40% curtailments in Europe, we look at Russian exports that are probably going to be a quarter of normal levels for ammonia. Those have not been offset with new production or new supply or new plants around the world so that overall supply tightness should create a bit of a market premium. With nitrogen in particular, we are seeing certainly some natural gas pricing that’s driving a premium in that marketplace, particularly when we look at the cost curve in place that are running off of LNG in Asia or if we look at in Europe where the marketplace is, those European hub prices are trading anywhere from $12 to maybe as high as $15 in the short term and then by the end of the year closer to the high teams on an MMBtu basis. That’s going to drive into those production costs for nitrogen and create a bit of a premium in the marketplace as a result of that.
(15:51)
And again, those higher gas prices, particularly in those regions of the world are a function of the supply constraints driven against Russian sanctions. I don’t necessarily feel like this is a function of this broader inflation where we have a tonne of consumer demand that’s really driving price appreciation. I think it’s really a function of we don’t have the normal supply levels available and so that is impacting our ability to supply marketplaces and growers and buyers in the marketplace are competing for that product availability and as a result there’s a bit of a premium in place.
Mike Howell (16:33):
Mark, we started this conversation talking about my first eKonomics class and the second lesson that I remember from that class was the supply and demand side. We talk about if we have a tight supply that that’s going to increase the prices most of the time, and what you just said was we definitely have a tight supply versus demand and prices have came down, so that’s, going back to my very first statement is making this eKonomics harder than it should be. With the tight supply and demand situation that you talked about, that leads us to believe that these prices are going to increase again in the not too distant future. Now, we don’t want to speculate or anything like that, but am I way off base? Are you seeing a potential for increased prices coming around the corner?
Mark Tully (17:12):
Yeah, it’s a great question, Mike. As we deal with what’s really a unique experience in the fertilizer sector where ultimately you’re right, supply remains constrained. With healthy crop commodity prices and strong grower margins and an incentive to increase acreage, we expect input demand to increase in 2023 and for potentially demand at points and regions in the year to outpace supply availability and traditionally from an S and D or eKonomics perspective, you’d expect another run up in pricing and that’s something that we’ve seen the opposite of through this year, which is prices have declined. I think the big thing that we have to continue to consider is what has shifted from the buyer side in the marketplace and when we’ve looked back one year ago, I’ll repeat that story where we saw regions and markets all over the world engaging in April and May of 2022, so you had Latin America engaging, you had North America engaging, you had parts of Asia engaging, and they were buying product in many cases in a non-normal period of when their seasonal demand would be peaking.
(18:35)
And as we’re into 2023, what we are seeing is a return to normal seasonal demand periods for these regions around the world and what we’re largely seeing is Europe might engage and then North American engages and then maybe we’ll see Latin American engage or Southeast Asia and they’re not necessarily doing them all at the same time. They’re engaging just in time for their seasonal needs and as a result of that, I think that the demand side pressure isn’t necessarily going to drive us back to pricing that we saw in 2022 where in many cases it was record levels, but certainly believe it’s very plausible that as particular regions of the world begin to engage that we may see price appreciation particularly in that spot market, as we saw this year in North America during our spring season, as buyers in this part of the world started to engage, we did see a noticeable appreciation in fertilizer prices in that region.
(19:45)
Again though, not reaching levels that we saw at peak during the spring of 2022. As we look at the balance of 2023, I think what we are more than likely to see is more stability in pricing relative to the extreme volatility we saw in 2022, but with periods of probably up and down pricing response depending on the level of demand and where that demand’s coming from.
Mike Howell (20:10):
Well, Mark, we appreciate your insights on that. We’ve spent a lot of time talking about fertilizer and fertilizer prices. If you can, let’s talk just a little bit about our crop prices. They’re coming down as well compared to this time last year. Are we looking at the same factors that are bringing those prices down or do we have other things that are impacting that as well?
Mark Tully (20:31):
Well, I think from a crop commodity perspective, this again is a story where the marketplace remains supply constrained. Global grain stocks to use ratios are at the tightest levels they’ve been in 25 years and very unlikely that this new crop is going to be enough to reset that supply and demand balance. This is probably a multi-year cycle to rebuild stocks to use ratios back to historically normal levels and particularly so with Ukraine continuing to struggle to export their product and produce a normal crop, and they’ve become a major player in global grain export markets over the last decade. To simply have them be a third of what their normal production is, that’s a significant impact and one that you’re not going to fix overnight. But again, to your point, Mike, we definitely have seen some depreciation in crop pricing over the last couple of months in particular.
(21:35)
And I think a couple of reasons for that, one, we’ve had the South American harvest for their soybeans and the planting for their corn crops done and prospects look pretty reasonable for that corn crop, and so there’s that Brazilian crop that’s looking pretty big and I think has added some pressure to the marketplace. That’s partially offset by what’s been one of the worst crops in recent memory in Argentina where significant drought has impacted their ability to produce normal levels. I think there’s that piece of the puzzle where you do have some fresh supplies come to the marketplace that’s added some pressure, but on top of that, we’re also in that season of the year where there’s nothing but new crop coming. We don’t know what it’s going to look like yet, but the assumption is if we get great weather and all those acres get planted and growers hit trend yields, that supply would improve.
(22:32)
We don’t know that’s going to happen quite yet, but I think traditionally this time of year the marketplace bakes in some of that into the trade and we do see a level of that risk premium that is in the marketplace start to dissipate as you’re in that waiting window for that new crop. I think crop pricing as we move forward is going to be quite dependent on what the conditions look like in North America and what the yields and what the crop starts to actually look like. But overall, it does seem as though the marketplace has pulled some of that risk premium from the loss of Russian wheat exports, the loss of Ukrainian wheat and corn and oil seed exports with this potential for greater exports in a fresh North American crop. That’s not to say crop prices are bad though. I mean, we’re continuing to see crop prices trade well above historical normal levels, and I think today with the significant depreciation we’ve seen, particularly in fertilizer input costs, that affordability metrics and margins for growers are actually quite strong relative to history at these current prices as well.
Mike Howell (23:42):
Well, Mark, you’ve given us a lot of information today and my simple mind trying to take in everything you said, it sounds like we’ve been on a rollercoaster and 2022 that rollercoaster went really high and then it turned and started back down pretty rapidly. Sounds like we’re off of the really steep parts of that rollercoaster. We’re still going to see some bumps in the highway coming along, but sounds like things are going to start stabilizing out a little bit for us. Did I capture what you said a little bit?
Mark Tully (24:07):
Yeah, I think that’s a great analogy. There was lots of ups and downs and volatility that we experienced in 2022. I think we’re still on the rollercoaster ride in 2023. There’s probably going to be some more ups and downs as we get through this year, but ideally the peaks and valleys are a little bit more constrained than what we experienced in 2022. To your point, hopefully a little bit more stability as we get through the balance of this year.
Mike Howell (24:35):
Well, that’s great. I hate rollercoasters. I can’t stand to be on them. It just scares me to death. The kids love the rollercoasters, but they’ll grow out of that one of these days, I’m sure. So Mark, we really appreciate you taking the time to visit with us today. Do you have any closing comments you want to leave our listeners with?
Mark Tully (24:51):
Only closing comment from me as I know folks, particularly in North America, are hard at it in the spring here, putting the crop in and keeping busy is that I hope folks are able to work safely and diligently and get that crop in because in 2023, I think it’s more important than ever that we continue to produce really strong crops out of our region of the world. That’s a stable exporter of the ag commodity products that the world desperately needs right now.
Mike Howell (25:20):
All right, Mark, we surely appreciate it.
(25:24)
Well, listeners, we’re going to move into our second segment now and we’re going to start talking about our famous person in agriculture. Today I thought we’d spend just a moment talking about Eli Whitney. Now, most everybody has heard of Eli Whitney from back in grade school, and we learned that Eli Whitney invented the cotton gin. That was one of his biggest claims to fame. Eli Whitney actually grew up on a farm in Massachusetts and he went to Yale. After graduating from Yale, he was hired as a tutor on a farm in South Carolina. He saw all the problems with the cotton and the slaves were actually separating the lint from the seed by hand, and it just took him a few days to develop a cotton gin that really speeded that up. Whitney’s idea behind this was that we could do away with a lot of the slave labor if we had a machine that would separate that, but actually it backfired on him and increased the need for slaves to produce even more cotton and made cotton the commodity that it is today.
(26:19)
Whitney didn’t really appreciate this side of it and changed his visions altogether. He started working on interchangeable parts. Now, a lot of people gave Whitney credit for discovering interchangeable parts, but that was actually been in place for many years before his time, but he was a big proponent of that and got into the arms industry and started making interchangeable parts for guns. Those parts were actually used in the Revolutionary War, made the war effort a lot better for the north than it did for the south, and that way Eli Whitney did accomplish part of his goals is to eliminate a lot of the slavery that was going on in the south. But Eli Whitney was a great inventor. He invented a lot of things that we still use today, a great man in agriculture and got the cotton gin going and helped promote cotton to where it is today.
(27:04)
Listeners, we really appreciate you tuning into this week’s episode and want to encourage you to go back and listen to some of our previous episodes if you’ve missed some of those. Also want to encourage you to check out our website, that’s nutrien-ekonomics with a k.com. You can find more information on our topic today and many other topics on that website as well. Until next time, this has been Mike Howell with The Dirt.
