Grainswest - Fall 2022

Fall 2022 grainswest.com 37 That about sums up the tale of fertilizer over the last two years. After all, it was only two years ago in Western Canada that urea sold at $400 per tonne. That was the beginning of the end of low prices. Many forces have been at play as the state of flux in the world of fertilizer continues to take farmers on a wild ride whether they want to take the trip or not. With so much at stake, and with prices so high, many wonder when will things “go back to normal?” After such a prolonged period of uncertainty, perhaps this is normal. The summer of 2020 got off to a good start, especially across the Midwest U.S., where about one third of the global corn and soybean supply is grown. That changed on Aug. 10, 2020. Weeks out from harvest, a violent 14-hour storm known as a derecho travelled some 1,200 kilometres through six states with Illinois, Indiana and Iowa being the hardest hit. The brutal weather event that tore over the landscape was the first of many dominoes to fall in the madness that is today’s fertilizer marketplace. One of the world’s foremost fertilizer marketing experts, Josh Linville of StoneX Group fingered the derecho as the absolute catalyst for the current state of affairs. “That caused grain prices to go from very, very low to very, very high,” he said. “Demand went from non-existent before that event to phenomenal.” From there, farmers’ fertilizer demands soared due to the influx of cash and week after week grain prices climbed steadily to record levels for virtually all crops. The spring of 2021 was strong and demand for inputs did not waver, nor did their prices. Fertilizer companies drew down inventories to some of the lowest levels on record, noted Linville. As crop prices remained bullish, fertilizer likewise began to trend upward. In June 2021, the price of urea sold by Prairie retailers crested above $600. Simultaneously, tensions mounted between Russia and Ukraine throughout that year. This led to rising European energy production and prices that were eventually labelled a crisis by market analysts. By September, local prices hit $900. That same month, Chinese officials blinked and took swift measures to protect its sovereignty. As the world’s largest phosphorus producer, it stopped all exports overnight. The government said it was necessary to preserve domestic supply for its own farmers and that restrictions would lift on June 30, 2022. The country never resumed normal levels, but eventually implemented an export quota system that will see steep declines in annual tonnage moved to other nations until at least 2023. Meanwhile, Linville continued to observe the flurry of weather-, production- and conflict-related activity that sent markets severely out of balance. “It wasn’t one action that caused prices to go sky-high, so it’s not going to be one action to cause prices to go way back down to where they were,” he said. Overall, the global economics of fertilizer have been a tremendous benefit for North American natural gas producers. Despite recent price increases, production costs of natural gas remain low enough that margins are big. “They jumped up [USD] $6, $7, $8, $9, but that is still very, very low on our cost of production versus what they’ve been able to sell it for,” he said. He added it has also helped Persian Gulf nations where natural gas is a byproduct of oil production. Natural gas prices in Europe had jumped to more than USD $80 and Asia hit above USD $65 as recently as late August 2022. But for every winner, there’s always a loser and farm retailers shoulder a disproportionate amount of risk during these nervy times. Linville notes retailers constantly walk a fine line between buying lower and selling higher. This has become a massive challenge when price predictability is nearly impossible and, “That puts them in a very unique and dangerous situation.” If it sounds a bit hyperbolic, Brad Hanmer, owner of Synergy AG, confirms it’s really not. The agri-retailer owns and operates 11 locations, ten in Saskatchewan and one in Alberta. He said during his farming and business career he hasn’t witnessed anything like what’s taken place since 2020. It’s caused him more stress from both a corporate and personal perspective. “Farmers were a lot more affected than the retailers allowed them to realize because we took a lot of that shock absorption,” he said. “It was very scary. I’ve had many sleepless nights.” There have been many factors that have led to various supply chain problems, from the pandemic through to natural gas production issues and geopolitical tension. The biggest factor that has kept Hanmer’s business afloat is simply good customer relations, which eased uncertainty during an already strenuous time. “It wasn’t one action that caused prices to go sky- high, so it’s not going to be one action to cause prices to go way back down to where they were.” —Josh Linville