From 2000 to 2007, fertilizer “world demand grew by nearly 23 percent … for an average of over 3 percent a year. Nitrogen use grew by 22 percent, phosphate by 17 percent, and potash by a whopping 31 percent.”   

The majority of this growth took place in China, India and Brazil.

“Chinese and Indian agriculture initially focused attention on the nitrogen side of the fertilizer market in order to increase yields. They eventually ran into phosphate deficiencies which limited further yield growth. (They, then) focused on increasing phosphate demand. A similar thing happened on the potash and they’re now more focused on potash use. … This means that world potash demand should continue to grow quicker than nitrogen or phosphate in the future.”

Vroomen pointed to the connection between natural gas and fertilizer. “As a primary feedstock for ammonia production, historically the cost of natural gas alone accounted for 70 percent of total ammonia production costs. All that changed when U.S. natural gas prices rose dramatically after 1999.”

U.S. natural gas prices – “which historically averaged below $2 per million BTU” – quadrupled to over $8 by 2005. With such prices, natural gas accounted for nearly 90 percent of total ammonia production costs.

The consequences of this on the U.S. nitrogen industry were dramatic. “As gas prices rose, and continue to rise, producer margins were squeezed and eventually turned negative. A total of 25 ammonia plants (about 40 percent of total production capacity) closed from 1999 through 2005.”

The drop in domestic production shrank U.S. nitrogen supplies and raised prices. The United States then turned to the world market for nitrogen and, from 1999/2000 to 2007/2008, “imports rose from 6.3 million nutrient tons to 11.7 million nutrient tons annually. And this happened at the same time we had a dramatic increase in world fertilizer demand.”

The U.S. fertilizer industry – “which typically supplied 75 percent of farmer’s nitrogen needs from U.S.-based plants prior to 2000 – now relies on imports for over half of its nitrogen supply.”

Potash/shipping/hoarding

Only 12 countries in the world produce potash. Of those, only 10 export the commodity.

“Brazil and China use all the potash they produce and also import significant amounts. The largest potash producers – Canada, Russia and Belarus – account for two-thirds of total world production. These same three countries account for 75 of world exports.”

The 10 potash-exporting countries supply potash to over 100 nations. The largest importers of potash are China, the United States, Brazil and India.

“The 31 percent increase in potash demand through 2007/2008, and the continuation of strong shipments through the summer of 2008, led to the lowest level of potash inventories on record. … Again, that placed upward pressure on prices.”

As for shipping costs, “China’s booming economy and appetite for resources drove ocean freight rates up 500 to 600 percent from January 2001 through May 2008,” said Vroomen. “Higher energy prices also drove up the costs of truck, barge and ocean freight rates. Railroads no longer want to haul ammonia for liability reasons and have raised rates significantly.”

Another inhibitor: the U.S. dollar fell significantly into the summer of 2008. “This also played a part in increasing fertilizer prices. … Since fertilizer materials are priced in U.S. dollars around the world, exchange rates matter.”

Other factors tightened the market further. “The issue of hoarding, or limiting exports, first showed itself in the form of curbed food exports in 2008. … These same types of export restrictions were (later) put on fertilizer…

“The most significant example of this is China’s export tariffs on urea and ammonium phosphate. China is the largest exporter of urea in the world, accounting for 16 percent of world exports in 2007. China is also the second-largest exporter of ammonium phosphates in the world, accounting for 24 percent of exports in 2007. So, when China raised export tariffs to well over 100 percent (actually, up to 185 percent) in the spring of 2008, world markets tightened further.”