In the first half of 2022, global fertilizer prices soared to record highs and fertilizer demand declined under the influence of multiple factors such as supply chain disruptions and geopolitical conflicts. At the same time, high oil prices, sanctions and export restrictions have led to a shift in global fertilizer trade patterns that may still continue into 2023, all of which will put pressure on lower 2023 food production expectations.
The chain reaction of high fertilizer prices
Global fertilizer has experienced a round of price spikes since the onset of Covid-19, and the turmoil in the fertilizer market has been exacerbated by Western export sanctions against Russia and Belarus following the Russia-Ukraine geopolitical conflict, as well as export restrictions by some major fertilizer producing countries. All these unfavorable factors have further reduced farmers' affordability of fertilizer in 2022, which in turn has led to a decline in demand for fertilizer.
With the 2023 spring sowing day drawing closer in the northern hemisphere, future fertilizer demand from farmers is becoming increasingly uncertain, making the outlook for next year's grain production even bleaker.
Despite growing recognition of the urgency of global food security, there are reasons to be cautious about improving the situation quickly. Because history shows that the lifting of sanctions related to geo-conflict tensions is often a rather difficult process, which also takes a lot of time.
Global fertilizer trade pattern is undergoing significant changes
As we all know, in the international market, Russia is a major supplier of nitrogen and potash, Belarus is a major supplier of potash, China is an important supplier of nitrogen and phosphate fertilizers, and the EU is an important supplier of phosphate fertilizers. And currently, exports from international sellers in all of these fertilizer markets are declining significantly, which has forced import-dependent countries to look around for other alternative supplies.
For example, in the EU, local ammonia and urea production has fallen due to the sharp spike in natural gas prices in the earlier period, and with the reduced inflow of Russian products, the EU's sources of imported nitrogen fertilizer have now been replaced by other countries such as Egypt and Algeria; potash exports from Belarus to the EU have ceased until September, with Russian exports to the EU falling by more than 70%, and these reduced part of the potash is made up by Canadian potash.
In the process, European buyers are crowding out other buyers, which has a similar situation to the LNG market. At the same time, other large fertilizer importers, including Brazil, China, India and the United States, are not abandoning Russian fertilizer and are absorbing some of the available fertilizer. This has forced a reduction in fertilizer imports from some countries with less purchasing power.
Global Fertilizer Trade Flows
As fertilizer prices continue to run at high levels in 2022 and fertilizer imports are restricted in some countries, this has prompted fertilizer producers around the world to increase production at existing plants and increase investment in new capacity, which in turn will have a downward impact on prices, but despite this, some fertilizer supply gaps are likely to exist in 2023.
Geopolitical conflicts will remain a major factor in the evolution of the market in 2023, with Western sanctions on Russian and Belarusian exports being particularly influential. A de-escalation of the Russian-Ukrainian war and global pressure to reduce restrictions on fertilizer trade flows for food security could lead to an easing of sanctions. This could lead, for example, to the reopening of the Russian Tauriyati-Odessa ammonia pipeline (production: 2.5 million tons, 1.5% of global production) and the release of fertilizer cargoes stranded in European ports. However, if the Russian-Ukrainian war escalates further, a further tightening of supply cannot be ruled out.
Impact on global food production
In our view, the impact of higher fertilizer prices on food production this year is moderate because in the early part of 2022, although fertilizer prices were already at relatively high levels at that time, farmers were still relatively affordable compared to the late spike and had already purchased some of the fertilizer before the price spike. But with the late spike in fertilizer prices, it has led to a significant drop in fertilizer imports in many countries compared to last year, and this could have a more pronounced impact on food production in 2023.
This is especially true in African and Asian countries, where farmers generally lack the means to cope with shortages and receive less government support than their counterparts in Europe, the United States, and China. However, the process is likely to be gradual for two reasons.
First, while reductions in nitrogen fertilizer application will directly affect yields and the consequences of the reductions will be immediately apparent, reductions in phosphate and potash use have a longer lag. Second, farmers will also make certain changes to reduce the impact of higher fertilizer prices. For example, they may increase the use of organic fertilizers or be more precise in their use of fertilizers, or they may choose to shift to crops that require less fertilizer, such as legumes.
Farmers will make changes in response to rising fertilizer prices
However, all these practices have their drawbacks and limitations. For example, precision fertilization or shifting to different crops requires a certain body of knowledge, so in general, it is still difficult to implement. To make matters worse, if fertilizer prices continue to rise, many farmers will likely have to reduce their fertilizer use, which may deal a heavy blow to future food production.
In addition, good weather conditions can mitigate some of the effects of inadequate fertilizer application in the major food growing regions, while severe weather may cause more problems, but in terms of the evolution of global weather conditions, it seems that extreme weather in general is showing an increasing frequency of occurrence.
In conclusion, there are still many risks in the fertilizer market in 2023, and volatile fertilizer prices are overshadowing the outlook for food production in 2023.
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