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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 economics.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. Listeners, thanks for joining in again this week. We have another exciting episode in store for you this week. We have gotten Mark Tully back with us. Now if you remember, we had Mark on just a few weeks ago and he was talking about the market situation, what prices were doing with our grain crops and other commodities as well as fertilizer prices. We’ve got Mark back with us today to help talk about that. Mark, how are you this morning?
Mark Tully (01:00):
Yeah, doing well. How about yourself, Mike?
Mike Howell (01:02):
I’m doing great. Mark, last time we talked, every price we were looking at was at a record high and looked like it was still going up and you talked about some things that would need to change for those prices to come back down a little bit. And since that time, we have seen a little bit of price decline. What has led the price decline on our crop prices?
Mark Tully (01:19):
Yeah, great question, Mike. And certainly we have seen some declining prices really across all commodities, not just crop, since we last spoke in the spring, and I think there’s a few big drivers for that at the moment. But ultimately, I think what we want to do is take it back to the fundamentals and I think the fundamentals for crop commodities are still incredibly strong. But firstly, we’ve entered this, I think, market environment where really the global sentiment around the economy has shifted a little bit towards a more negative attitude. We’ve seen rising interest rates, a strengthening U.S. dollar, which impacts exports, falling crude oil prices, and I think overall, that’s shifted some of the speculative decision making in the marketplace or those speculative funds that participate in crop commodities. And so they’ve transitioned some of those funds from being net long to more short positions.
(02:08):
And so that’s part of, I think, what we’ve seen impact the crop commodities negatively. But at the same point in time, we’re in the midst of the growing season and weather reports have had an impact. We’ve seen, even this week, some cooler weather and some better rains in areas that have struggled with drought. So that’s helped to maybe stabilize yields in some places of the U.S. and as a result that leads to potentially better crop production and lower crop prices. And then lastly, the geopolitical environment continues to improve to some extent on the crop front with shipments from the Black Sea grains starting up again. So at the end of July, Turkey brokered a deal with Ukraine and Russia to open three Black Sea grain ports and they’ve begun shipping product, about 500 to 600 kilotons of ag products have been exported under the agreement so far, and I think that’s led to some softening in the crop commodity market as a result of that.
(03:03):
But the one thing I’d say about that firstly is that that’s a lot lower than normal Ukraine grain shipments, significantly lower than what their normal would be. Additionally, the one thing that we haven’t been able to test yet is, “What do the inland logistics look like in Ukraine going forward?” So a lot of this product that has been shipped was near ports already in storage or, in some places, already loaded onto a boat waiting for a moment when the Black Sea would open so they could move that ship out of the port. And so what we don’t know yet really is, “How is the product going to move from the farm gate to the port for this new crop?” And so that’s something we’ll have to test here in the coming weeks and months. Ukraine’s ag ministry has said that for the current crop year, grain exports are still down 52% year over year, so that’s a significant decline keeping the markets tight, but I think those are probably the three or four major things that we are seeing that has led to some of the softening in markets today.
Mike Howell (03:56):
Mark, you mentioned Ukraine and the conflict going on over there. When this first started, we all thought that it would last a few weeks, maybe a month or two at the most, and I think it’s going on a little over six months now and no end in sight. Do you have any other news from that region? Did they get to crop planted and if so, is it projected to be off or what’s the projections coming out of that region?
Mark Tully (04:15):
Yeah, it certainly has been a significantly longer conflict than I think many folks anticipated at the start, and obviously it’s a humanitarian crisis and one that is a challenge that the world’s got to work its way through. But in terms of the crop, specifically what’s gone on in the Ukraine, well, I think best estimates are around 30% of the crop didn’t get planted, give or take a few percentage points depending on the specific grain or oil seed product. On top of that, I think it’s likely safe to assume that yields will be down. Weather hasn’t been perfect, particularly in southern Ukraine. I think normal crop management has been a challenge, putting the traditional inputs down onto the crop.
(04:55):
There’s supply chain constraints within a country that’s in outright war at the moment. I think that’s going to have an impact on yields and that’s something we’re watching for. I think, depending on the Ukraine ag ministry and the USDA and other estimates, maybe yields will be down 10% on the crop year over year. So when you add those two up, 30% less area planted, 10% smaller yields, that’s 40% of the Ukraine crop down year over year from a production perspective. And that’s significant when we think of the importance of Ukraine from a global export perspective.
Mike Howell (05:26):
And as you mentioned, we still don’t know if they can get that to market or not with everything else going on.
Mark Tully (05:31):
Yeah, that’s a challenge that we’ll have to work through. I think maybe additionally there’s a lot of news going on in Western Europe as well relative to their crop, Mike, and that’s something we should probably call out as well. So specifically Western European drought has been significant this year, and so we’ve got this challenge going on in the Ukraine, but when we think of countries like Spain, southern France, Italy, Germany, these are all major grain growing regions in the world as well, and the European Union has cut their yield forecast for major grain and oil seeds by eight to 9% year over year. So that’s a significant cut in a portion of the world where we really need to see above trend yields right now with the challenges going on in Ukraine. That’s something I think worth mentioning in the European story at the moment too.
Mike Howell (06:16):
Mark, you’ve mentioned Eastern Europe and Western Europe, 10 to 15% reductions. We’ve got the drought going on in the U.S. I know we did get some rains recently and hope that’s going to help this crop, but all projections are that the U.S. crops are going to be off a little bit this year as well. That just seems like it’s tightening that supply even more. Is this going to be a temporary decline in prices? Do you think we’re going to get another run up as we enter into fall and harvest season or what do you think’s going to happen with this?
Mark Tully (06:41):
Markets are really volatile right now, so calling this with any certainty is a bit of a fool’s errand, but I think we can turn back to the fundamentals and to your point, you highlight the crop production issues globally at the moment, and that’s ultimately leading to tight supply situations all over the world. We’re dealing with high food prices and supply constraints, and that’s driving food security challenges on top of that. I know the World Bank noted this month that as of August, at least 23 countries have implemented food export bans and another 11 have export limiting measures in place. And so we’ve got this trade imbalance that’s developing around the world. Grain stocks to use ratios excluding China are the tightest they’ve been since 2007, 2008. We’ve got under-production, like you say, in North America. We had a smaller crop go in the ground due to a poor spring window.
(07:30):
We’ve got some drought concerns across the U.S. that are likely going to impact yield in a negative way. We’ve got the existing challenges in Europe that are going to lead to smaller crop production there, and then even in Europe where you have potentially a bump Russian wheat crop, you’re dealing with sanctions in place that are limiting the ability to trade that crop from a financing perspective as well as getting a ship to go and pick up that crop out of Russia. So that’s keeping things tight on that front, and then now we’re looking forward to the Southern Hemisphere and what is going to be produced in South America this year, and the one major weather trend still exists is La Niña, and that can bring drought to producers in South America as well. When we look at this from the supply side, I think there’s a lot of production challenges that exist and then that’s going to really keep the S&D for grains, I think, tight heading into next year as well.
(08:24):
The one thing to watch I think is ultimately the greater macroeconomic story that’s in place here today. We mentioned rising interest rates, a stronger U.S. dollar, falling commodity prices across the board, and then really just a deteriorating sentiment, I think, from the financial sector. What is the economy going to do in 3, 6, 12 months from now? Is a recession of possibility? I think that’s something that can definitely have an impact on the crop commodity prices that exists outside of really those incredibly strong fundamentals that exist supporting, I think, historically strong crop prices that should remain above historical averages as a result of those fundamentals.
Mike Howell (09:03):
Well, Mark, so far we’ve talked a lot about grain prices. What about our input prices, things like fertilizer, fuel, herbicides and insecticides, those type of things? What are those prices doing these days?
Mark Tully (09:14):
Yeah, I think all of these products, generally speaking, are commodities and I think generally speaking, commodity prices across the board have fallen to some extent. So I think we are seeing some lower pricing. Certainly, if we were to think back to filling our pickups a couple weeks ago or even a month ago, it’s a lot cheaper today than it was, and that’s a result of those falling fuel prices across the board. But I think looking at this maybe more specifically, let’s dive into it maybe input by input. Starting with fertilizer, I think prices are declining to some extent for fertilizer, but they do remain historically strong and I think they are supported by the supply fundamentals that exist for each one of those nutrients at the moment. We did have a poor North American spring, I think, which impacted application windows for NPK.
(10:02):
We had a smaller crop. We didn’t have the total acreage that was maybe anticipated at the start of the season, and so as a result, there’s, I think, some carryover in North American markets that has led to some softening in fertilizer prices in that part of the world. But this is in, I think, strict opposition to really where the supply side is on the fertilizer front. When we look at nitrogen, we’re dealing with a natural gas story that’s pretty much unprecedented at the moment, and so maybe taking a look at nitrogen to start, ultimately you need fossil fuel feedstocks to create nitrogen products. And what we’re seeing is record high oil and gas prices, particularly in Europe, as a fallout of the war between Russia and Ukraine. At the moment, natural gas prices in Europe are about $70 per MMBtu, which translates into an ammonia production cost of about $2,400 a ton.
(10:51):
And so we’re seeing European nitrogen producers actually shut down production because the economics don’t exist to produce, and I think that’s immediately reacting into a tightening nitrogen supply side globally. We also have the existing challenges for Russian exporters on the nitrogen side of things, particularly for ammonia. When you look at it as a whole, Russia and Europe combined have about 20% of global ammonia capacity. When these economics aren’t working and there’s sanctions in place, producers around the world have to fill that gap, and ultimately, there’s no one single area of the world that can fill that level of a gap if demand remains normal on the nitrogen front. And then we also have Chinese urea export restrictions, which is also, I think, tightening the nitrogen supply side. Although we’re seeing some falling prices in nitrogen, I think there is supply side fundamental support to keeping those prices higher than what we would be used to from a historical average perspective.
(11:50):
Moving into potash, similar story here on the supply side. We’ve got significant fallout of sanctions against Russia and Belarus as a result of the war in Ukraine, and that’s 40% of global potash production and exports that we’re talking about. Although we’ve seen some, I think, healthier export supplies from Russia to date, at the same point in time, we’re really not seeing Belarus active in the marketplace at all. There’s a gap there that needs to be filled if we want to see normal demand, and ultimately, again, there’s really no producer in the world who can fill the volumes that is being lost out of Belarus, and so expect a tight S&D and likely, again, fundamental support for prices. And then finally, on the phosphate front, you do have higher cost of production for phosphate as a result of the nitrogen story, so higher ammonia pricing, although sulfur is getting significantly cheaper, which I think is helping that complex.
(12:45):
But at the same point in time, China has put significant export restrictions on their phosphate exports. We’re looking at it as maybe 5 million tons of exports from China will be out of the market in 2022. That adds some tightness to the global S&D. As a result, I think when we look at fertilizers as a whole, there’s some supply side challenges that are going to keep the market tight going forward. Moving to some other big inputs, we think about seed, and so looking ahead to where seed pricing’s likely going to go, I think it’s up. When we think of where commodity prices are for major crops, that’s a primary cost. When we’re thinking of seed production with higher crop commodity prices, I think anticipating higher seed prices for the next season is probably a likelihood. And then maybe lastly, the other big shelf for inputs is crop chemicals.
(13:34):
I think the big list of crop chemicals that exist that you maybe want to use, and I think there’s a slightly different story depending on each crop chemical, but ultimately when we look at this as a whole, two things I’d point to. First is freight is incredibly expensive at the moment, and that’s going to lead to higher pricing in the crop chemical shelf as a lot of it is produced overseas, so places like China, as an example. The other piece of it is there’s production outages around the world. We have difficulty getting commodities that are inputs for some of those active ingredients, and at the same point in time, we have incredibly high fuel prices, natural gas prices that are leading to production curtailments around the world for some of these active ingredients. I think we’re probably going to see some tightness in a number of active ingredients as well that support higher prices for the crop chemicals. I don’t necessarily want to sit here and say that we’re going to see record high pricing in each of these shelves like we maybe saw earlier this spring, but I do think higher pricing relative to what we’re used to seeing is very likely, I think, going forward here.
Mike Howell (14:37):
Well, Mark, you’ve talked about an awful lot this morning. It seems like it’s a lot of volatility, a lot of moving parts, and we just don’t know what to expect for the next few months. What’s your best advice to growers under these circumstances? What’s your take-home message for our growers today?
Mark Tully (14:51):
Yeah, I think the take-home message for the growers today is to really watch the fundamentals when we’re thinking about what’s going on with these commodity prices, and ultimately, I think the fundamentals are driving these higher pricing that we’re seeing. A lot of it is on the supply side where traditionally, I think, in many of these up cycles that we’ve seen in pricing, there’s been a demand side story, but in this case, there’s a lot of supply side stories, and so continue to watch how the development of Ukraine grain exports occurs. I think we need to watch what production looks like globally here.
(15:23):
I think we’ve mentioned challenges in Europe, challenges in North America and potential challenges in South America going forward with the La Niña. And then on the input side, again, a lot of supply side challenges. The things I’d be watching for, particularly for fertilizer and chemicals, is the direction of natural gas prices and how that develops over the coming weeks and months as well as sanctions against Russia and their allies like Belarus and how that impacts their ability to ship product going forward. As a result of that, I think the advice to growers is continue to be abreast of what’s going on in the markets, and ultimately, I think we can expect tightness here in the short to medium term across a number of these commodity markets that do impact pricing.
Mike Howell (16:08):
Mark, we really appreciate you taking time to be with us today. I know you’ve got a busy schedule, but a lot of great information that our growers can take advantage of. Mark, we’ll let you run for today and we’ll have you back on here in a few months and see what happened with this harvest season and see what we’re looking at going into planting time for next year. Thanks a lot for being here.
Mark Tully (16:25):
You bet. Thanks, Mike.
Mike Howell (16:30):
Well, listeners, it’s our tailgate time again, we hope you’re enjoying this segment as much as we’re enjoying bringing it to you. Last week, we did our stuffed cheeseburgers at the ballgame and everyone enjoyed those. We had a big time and the rain hampered things a little bit, but we were still able to get our tailgating done and play around a little bit and have a good time before the ballgame. Now this week, we’ve got another menu lined up. We’re going to start off with some hor d’oeuvres. We’re going to put some jalapeno cheese deer sausage on the grill, and we’re going to cut that smoked sausage into small lengths about an inch, inch and a half long. We’re going to put that on the grill and let it get good and hot, and then we’re going to coat it with some Sweet Baby Ray’s Barbecue Sauce, and then let it cook a little longer and cook that barbecue sauce into it.
(17:15):
Everybody loves the deer sausage. When we get the deer sausage prepared and ready to go, we’re going to set it to the side and let folks start sampling on that while we get our chicken cooking. This week, we’re going to barbecue chicken. We picked up our chicken at the local butcher shop and they have a special rub that we’re going to put on this barbecue chicken. It’s a barbecue rub. We’re putting that on a couple of days ahead of time to let it really marinate into that chicken. We’re going to put the chicken on the grill and cook it real slow, and when it gets almost done, we’re going to spice it up a little more with some Sweet Baby Ray’s Barbecue Sauce and let that barbecue sauce cook in on the outside of it. We’re also going to have some new potatoes that we’ll put in the cooker and boil those while we’re cooking the chicken, and before we get there, we’re going to prepare some coleslaw.
(18:02):
That’s the menu for this week. If you happen to be at the ballgame this week, come by and visit with us and pull a plate up. The commodity that we’re going to talk about this week is the coleslaw and the cabbage that goes into that. I grew up eating cabbage and eating coleslaw all my life, but I never really understood why we called it coleslaw until I was in college. It was then I figured out that there was a family of plants that are referred to as the cole crops. Now, there’s several vegetables in this group, things like cabbage, cauliflower, turnip greens, mustards, kohlrabi. These are all some of the cole crops and they get their name cause cole refers to the stem. We’re actually consuming the leaf and the stem of these vegetables. Doing a little research this week and investigating a little more, some more facts about cabbage. The country that consumes the most cabbage is Russia, and they eat almost 50 pounds of cabbage per capita per year.
(18:58):
Now, we don’t consume nearly that much in the United States. We consume more like eight pounds per capita per year, so quite a big difference in the amount of cabbage consumed between the two countries. Now, if we look at the United States and look at where most of this cabbage is produced, 78% of our nation’s cabbage production comes from five states. Now, we do have production in all 50 states to some part, but the vast majority comes from California, Wisconsin, New York, Florida and Texas. We hope you’ve enjoyed this tailgating segment. It won’t be complete until we give you an update on last week’s ballgame. Hate to say it, but the Poplarville Hornets fell last week, 21 to seven. It was a close game all the way through. It was 21 to nothing at halftime, and Poplarville came back and really put up a fight the second half.
(19:48):
They just ran out of time and weren’t quite able to get it done this week. Coming up this Friday night, Poplarville will be hosting the Pearl River Central Blue Devils. That’s another intra county rivalry, another 5A school taking on the 4A Poplarville Hornets. So we’ve got the big bad boys coming to town this week, and we’re going to try to turn this season around and get a win on the board this week. We hope you’ll join us again next week and find out the results of this week’s game, find out what agronomic information we have for you next week, as well as our tailgating tips for next week. Until next time, this has been Mike Howell with The Dirt.
