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Hello and welcome to another episode of the Authoughts podcast. I'm Tracy Alloway.
And I'm Joe. Why isn't thal.
Joe, if you were a Roman general or a feudal lord and you wanted to wage war on your next door neighbors, I don't know. This is completely hypothetical.
Yeah, what time of year?
Yes?
Really, what time of year do you think would be the best time to actually do it?
You know, I haven't thought about this before. If I'm being totally honest.
You're not sitting at home thinking about if you were a Roman general, not all hours of the day.
I'm the one guy who doesn't think about stuff like that. I don't know much about Rome go on.
Okay, So for much of human history, if you were going to go to war, you would I try to avoid certain times of year, and those times were generally the spring sewing season and the fall harvest. And there's two reasons you would do that. One is because a lot of your soldiers are actually farmers. Okay, they're part time soldiers, so their day job is farming. And the second one is you don't want to completely disrupt your food supply.
Right, that makes a ton of sense. I hadn't thought about that, but yes, it makes a ton of sense, all right.
So fast forward to twenty twenty six, and we've clearly forgotten much of human history because we have a US Israeli war against Iran that is coming at perhaps the worst possible time in terms of agriculture.
You know what, again, I hadn't thought about this at all. So I did learn over the last week. You know, when I think about the shutdown of the straight up mus and so forth, obviously I think oil and energy. I have become aware through your writing and others that it's also a major choke point thruway for related food stuffs, including fertilizer. I had not heard anything about the timing element, however, until you just boil it up just now.
Yeah, So everyone's getting ready for spring planting at the moment, So this is precisely when you theoretically would be using a lot of fertilizer. And just in the past week or so, we've seen prices for urea, which is you know, one of the I guess most popular types of fertilizer. Those have shot up like twenty five percent. Yeah, It's also fascinating to me. I didn't know this, but we have all these different types of urea. So you have
Egyptian granular urea, New Orleans urea. We're going to talk about all of it. I've wanted to do a fertilizer episode for a long time. I want to talk about what's going on with the Moroccan fertilizer industry as well. But I am weirdly excited to be talking about urea today.
I'm looking forward to it.
Let's do it, all right, and we have the perfect guest. We're going to be speaking with Alexis Maxwell. She's an analyst on the Bloomberg Intelligence Agriculture team and she's been writing a lot about this. So Lexus, thank you so much for coming on a.
Loots Well, thank you for having me.
Is that framing correct? Is this kind of not a great time, slash the worst possible time to be driving the price of fertilizer up?
Yeah, definitely. I couldn't think of a worse time to have a supply side shock and resulting surge and fertilizer prices for farmers. Effectively, just about everywhere, the second quarter is the timeline when the Northern Hemisphere starts their planting season.
What is your real Yeah, so, urea is the.
Most commonly used form of nitrogen. Crops are going to demand a variety of fertilizers, but the big three that you have to use are going to be your nitrogen, phosphate, and potash. And in the industry we call it your npks. Urea is a form of nitrogen. I think about this
like a step ladder. If you want urea, the way that you get it is by starting first with natural gas, you crack it into ammonia, and then you run another chemical conversion on it and you turn it into a granular product that is easy to apply, easy to transport, and is about forty six percent nitrogen. And for those of you who've never applied fertilizer or planted crops, you probably bought some flowers at some point in your life and you get a little packet that has some like
white crystals in it. Yeah, you're going to have yourria in there to your flowers were out.
I don't know that that's interesting. Okay, So one thing I know about fertilizer other than most of it smells pretty bad. But you always hear this thing about the haber Bosch process and how the guy who basically, I guess invented the way we get fertilizer nowadays is responsible both for a massive boom in the human population because everyone gets to eat more, but also responsible for a lot of death at the same time. Can you talk about that, I guess the origins of all of this.
Yeah, I think I'll call it one of the greatest paradoxes of humanity, you know, Tracy, I can't think of an invention that, on one hand is more responsible for billions of lives but also at the same time generates a product that is used as a weapon of war. I think some people will tell you, you know, with the global population just over seven billion, about half of the people on the Earth today are here because of
conventional fertilizers. If we were to, let's just say tomorrow, stop using conventional fertilizer, and we converted everything back to organic and we formed every single acre of arable land out there, they say that the Earth could really only support a population of about four billion people. So conventional fertilizer is I think the most important invention to the most number of people on this planet.
Okay, explain to me. So urea comes from its downstream from natural gas, and so explain to me, like what happens, Like why not ship the gas? I mean, right now nothing is shipping or very little is moving through the street. But why is the process such that the first step, the transformation of natural gas to urea, happens at the source rather than later down somewhere else on the supply chain.
Yeah, so you'll find nitrogen fertilizer plants will often be co located with natural gas because to ship natural gas you have to chill it to very low temperatures and it's very expensive to move it. In contrast, urea is it's a granular. You can ship it in a as a bulk commodity item. It's much cheaper to do it that way, and you can reach a vast number of people. You'll find UREA plants around the world, but most of them are really located in places with low gas because
this is a competitive commodity industry. So you'll see these plants in places like Russia, the Middle East, the United States, and China.
Yeah, it reminds me a little bit of like aluminum, Like here is this thing that it's like Okay, you could ship it anywhere in the world. It's a lot easier to ship aluminum than it is to transport electricity via batteries. So you have the aluminum processing co located where you have cheap electricity, and then of course it's sort of trivial to move it elsewhere. How much of the world's urea is in conflict affected regions right now?
I just want to add one thing too about the urea and why we ship it. It has a very strong seasonality. So you know, when you run a large chemical manufacturing plant, you want to capture the economies of scale, and you want to run your plant three hundred and sixty five days a year. But the problem that we see in the fertilizer industry is that farmers only demand urea a very short period of the year, let's just say,
like two months of the year. So that puts these manufacturers in its sort of classic snake and egg supply chain problem. What do you do with the material the rest of the year. So it's much easier to ship it out than it is to store it and keep it on hand for farmers ten months out and to take that price risk.
Oh wait, now, I'm really interested how storable is UIA actually, because I think about those little packets. They seem like they could last for quite a while.
So while yeah, if you have urea and you can put it in a warehouse and you can have it covered from the rain and possibly other elements, you can probably keep it on hand for at least a couple of months, probably three, four or five months. However, you know, if you have a warehouse, the way that you really maximize the value of a warehouse is by turning the
inventory in your warehouse and selling that. So when you put urea in a warehouse, your takeoking on price risk over the period that since that it will sit in storage and you're not using your warehouse for what it's really designed for. So a lot of what we see with these UREA facilities it's making ship. There isn't a strategic reserve of urea the same way that we would have it like in oil for example, which is partially why this crisis is really compounding for urea at this
time of year. We don't have significant storage to replace what we're losing in the Middle East. Now the Middle East, if we look at the countries that are located along the Persian Gulf. About forty five percent of the world's tradable urea comes from the Middle East, and about about twenty percent of the ammonia comes from along the Middle East as well. So if you are in the business of trying to procure a replacement for what we've lost in the Middle East, there's not really a good next
best alternative at this point in time. You could try going to Russia to procure material, but a lot of the West has sanctioned Russia and their fertilizer products. You could try going to China, but China has an export band currently on their urea fertilizers and that's done to protect their domestic industry and their farmers, and that really kind of leaves you left over with places like Egypt or maybe the United States.
So is most of the eurea from the Middle East does most of it going to Asia?
So the Middle East is a great supplier for urea. They ship effectively everywhere every single day they're in the market, you know, a urea plant in the Middle East, just to keep their inventory sort of in balance. A lot of these producers are loading one vessel and shipping it every single day, and so where the shipments go from the Middle East depends on what time of year it is.
So when farmers are demanding product, like European farmers or American farmers, in the second quarter, you'll see more of the Middle Eastern EUREA go there. But in the second half of the year, you're going to see a lot more of the UREA move to places like India and Brazil, places that have a flipped season, to the northern Hemisphere and plant at a different time.
Okay, this is my chance. What's the deal with fertilizer in Morocco? Because I remember when I was in Abu Dhabi, there were a lot of you know, big national companies that were very excited about striking some sort of fertilizer deals with Morocco. What's going on there?
Yeah, So Morocco is among the world's one of the world's largest producers of phosphate. So phosphate is one of those critical NPK nutrients. Morocco is expanding their phosphate production and their low cost and because of their location in Africa, it's relatively cheap freight to get it to move around the world. I think of phosphate to the Moroccan economy a little bit like oil to the Saudi economy.
So if I'm looking at a ten year chart of back to Egyptian but Egyptian urea prices, they soared to over eleven hundred dollars a metric ton in the wake of Russia's invasion of Ukraine. That peak looks like around spring April twenty twenty two they got down to about a little under a three hundred dollars a metric ton, and twenty twenty four they're close to six hundred. Now, before we get to the effects of what's six hundred
a ton urea? What the impact of that is, What was the impact on the twenty twenty two price bike, What were the domino effect of that massive serve?
Yes, the twenty twenty two price surge was really two supply side shocks. In twenty twenty one, 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 twenty twenty one, when China slammed the door on exports, the world had to really scrambled for alternatives to supply. And then when we had the Russian invasion into Ukraine in the first quarter of twenty twenty two, we saw fertilizer prices spike on top of that because the world was unclear about
how we could source fertilizers from Russia. So Russia is a high volume exporter, they're a low cost producer, and Russia also is probably 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 did 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. Well, at the time, the price for natural gas in Europe, which is the feedstock for ammonia and then eventually urea, was surging over sixty dollars 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 a napkin math to do this. It takes about thirty four to thirty six mmbtus of natural gas to produce one
ton of ammonia. But if we needed thirty six mmbtus to make ammonia and I'm paying sixty dollars for natural gas, I'm looking at an ammonia price that's over twenty one hundred dollars.
So if I'm a farmer in the US 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 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 US farmers are probably best poised to whether 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 shift into soetins,
which demands significantly less amounts of nitrogen. The third option is, as a US farmer, you can switch among your nitrogen products. And then the last worst option is just not plant at all.
And what do you see happening right now? There was a headline, by the way earlier that I saw. We're already senators in DC are hearing from farmers talking about wanting to get relieved 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 five hundred and seventy five hundred and seventy pounds a time.
Yeah, 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 you know, Egypt urea is I think today close to seven hundred dollars still below about one third below the twenty two 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.
Oh that makes sense, and yeah.
It's all relative. You know that less incremental ton of nitrogen is going to give you a yield bump, So you kind of you 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, yeah, week it was that one twenty four. The highest it's ever been is one forty three. And with the price surge that we're
seeing again, this week. I expect once we have prices settle on Friday, that will set a new record for the most expensive that Urea has ever been to a porn farmer.
Tracy. This is going to make a good chart in the newsletter because I just charted it as as our guest was talking about it. And yes, we are very close to this. So even though on the pure yourrea price not necessarily at all time highs, but relative to chorn we are very close to all the time highs there. Yeah, I think this is important.
So the other thing I wanted to ask is you 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 twenty twenty two price spike, there's been some grumbling what's going on in the structure of the market that aims to make fertilizer prices an issue for the farming industry.
Yeah, So the farming industry in the US right now is margins are incredibly thin. If we look at like, 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. There's a lot of price pain out there in the US farm economy, and we're seeing Chapter twelve bankruptcies. Chapter twelve is a specialized form of bankruptcy for farms and fisheries starting to
pick up here in twenty twenty five. 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 seven and eight, kind of in line with the financial crisis. But what makes this difference is in contrast to I think it was a more of a demand cycle in No. Seven and eight that caused the amplification. But this time this is a supply side crisis.
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 straight up horror moves, we're almost let's say, you know, forty percent 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 I think much longer than many in the industry would have expected when this started in twenty twenty one.
When you say you can't get it, do you foresee a situation where you can't get it at any price?
Basically, Oh, Tracy, my eCOM professor would roll over and is great 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 the early emergence of your crop, it's you know, having a kid and needing to feed them, you know, vitamins at a certain point in there as they start to grow.
Sorry, everyone knows, after they're three years old, you don't have to feed them anymore. They for themselves.
At that point.
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.
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 Ukraine 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 rehen 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 Straight of Horn Moves has opened in a 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. 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 Horror Moves 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.
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, okay, 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 load of 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 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 molas.
So obviously everything is still in flux. And I should just add our standard disclaimer, which is where recording this on March tenth, 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 timeframe of when we might start to see some of this flow through the system. 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 US, and so I'm looking at what I might expect for
US cornyields to be this year. Last year we had a yield of one hundred and eighty six bushels per acre. I'm thinking at this point that we could see the US corniold be one hundred and eighty two bushels. But again, we still have a long road of production potential ahead of us. A lot of the cornield depends on what the weather looks like during the summer season, 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 are expecting to see a record urea a corn price ratio that will destroy a lot of urea demand. And so if the straight reopened next week, you know you would see urea price is sort of snap back to before. Maybe you would see them snap back to where they were before this war.
So thinking about like food production and the relationship with this. So we're planting now in the spring, I'm expecting lower yields for corn. For example, 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 will move through the food production system over a timespan of about a year or two.
All right, Alexis, thank you so much for coming on a blots and finally letting us talk fertilizer. I wish it was under better circumstances, but this was absolutely fascinating.
Thank you well, thank you.
For having me with my pleasure, Joe.
I'm never going to look at one of those little packets that comes with flowers fresh flowers the same way.
Again, No, I I could. I never used this. I no, maybe I put them in the water. I had no idea, but no, that was super interesting. And the sort of 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 this structural shift in supply.
Yeah, 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. Yeah, those business relationships are going to help you, is 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 US is probably going to make it out better than say in India, which needs gnat 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. 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 you know, most of the time you only need it, I guess twice a year, you know, once in the southern hemisphere and once in the northern hemisphere.
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 US, it's going to show up mostly at higher prices than the pump elsewhere. It's going to show up as literally an unavailability of 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 family, which is the risk when you do such a massive shock to the food supplant.
Yeah, all right, shall we leave it there.
Let's leave it there.
This has been another episode of the aud Bots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and I'm Joe Wisenthal.
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