Tacking Into The Wind

Gordon Cope, Contributing Editor, addresses how North American producers are reacting to the gale forces of the marketplace.

TACKING

INTO THE WIND

The global fertilizer industry has been experiencing massive challenges over the last year as COVID-19 and its ensuing consequences have upended virtually every segment of business, including agriculture. Fortunately, the sector has responded well in guaranteeing supplies and support to farmers and, as the year advances, prospects in North America are encouraging.

Nitrogen

In North America, projections for nitrogen look promising. During the COVID-induced doldrums in mid-2020, urea prices for NOLA FOB were under US$180/t. Starting in 2021, however, both industrial and fertilizer demand fi rmed up. With stocks in short supply, urea prices have risen signifi cantly to over US$350/t in early 2021.

In its 2020 fi nancial report, Nutrien noted that it experienced strong nitrogen fertilizer sales in late 2020 due to various factors. “For our nitrogen business, we saw excellent sales volumes, both for the quarter and the year,” said the then CEO and President of Nutrien, Chuck Magro, during a recent investors conference call. “We increased our nitrogen sales volumes by 700 000 t in 2020 due to strong North American operating rates and benefi ts from our de-bottlenecks and optimisation projects and good agricultural demand.”

Ammonia input prices in North America are expected to rise over the coming year, but still remain competitive when compared to other jurisdictions. During 2020, the US Energy Information Administration (EIA) noted that the Henry Hub price averaged US$2/1 million Btu, primarily due to demand destruction related to COVID. Domestic production has decreased by 2%, however, and is expected to average 95.9 billion ft3/d through 2021. As consumption recovers, demand pressures are expected to push the price up over US$3/1 million Btu, but will still be signifi cantly less than that experienced by European and Asian producers.

Gulf Coast Ammonia (GCA) is building what is being touted as the world’s largest single stream anhydrous ammonia plant, in Texas City, Texas, US. Completion of the 1.3 million tpy plant and adjacent deepwater port is expected by mid-2023. Air Products is investing approximately US$500 million to build a steam methane reformer, generators and hydrogen pipelines to service the project.

In late 2020, Koch Fertilizer announced a US$90 million investment at its Beatrice nitrogen plant in Nebraska, US. The money will improve environmental and safety performance, as well as increase urea and ammonium nitrate (UAN) capacity by 75 000 tpy. “We are committed to serving our customers, and we continue to see greater UAN demand locally,” said Scott McGinn, Executive Vice President of Koch Fertilizer. “This investment will improve the effi ciency and reliability of our operations and add greater production fl exibility at Beatrice to meet the demand of both our ammonia and UAN customers.” The upgrades are expected to be completed by late 2021.

Phosphate

Over the last several years, the phosphate market has been depressed due to a combination of low demand and increased competition from producers in the Middle East, Russia and Africa. In order to rebalance the market and meet environmental goals, China has been reducing its phosphate production capacity. Mosaic has also reduced production capacity in Florida. In late 2020, Nutrien wrote down US$760 million in the value of its US phosphate plants at Aurora, North Carolina, and White Springs, Florida. It cited the market as being “fundamentally oversupplied”, and expects the supply bulge to limit price appreciation for the next several years.

Internationally, other phosphate producers continue to expand. Morocco’s OCP is building three, 1 million tpy granular phosphate units at Jorf Lasfa. Ma’aden is ramping up production at the Wa’ad Al Shamal complex in Saudi Arabia with 3 million tpy of diammonium phosphate (DAP)/monoammonium phosphate (MAP) granulation capacity. PhosAgro has plans to increase production at its Balakovo and Volkov facilities in Russia by 30% by 2025.

Phosphate prices have recently skyrocketed, however. At the beginning of 2020, NOLA DAP prices were under US$300/short t. By May 2021, futures were above US$570.

The main reason is due to American trade duties. In 2019, the US imported 3.2 million short t of phosphate, mainly from Morocco and Russia. Domestic producers, including Mosaic – which supplies approximately half of the US market – claimed that OCP and some Russian suppliers were benefi tting from government aid in the form of low licensing fees and cheap natural gas. Mosaic petitioned the US Commerce Department to investigate. In November 2020, the federal agency responded with preliminary duties of 16.88% on Moroccan imports and up to 72.5% on Russian imports.

The American Farm Bureau Federation says that the move has pushed up prices too far. “We think this is really unfortunate,” said a Federation offi cial. “We’re concerned about its impact on American farmers, who have told us clearly that they want and rely on diverse supplies and we’re happy to be a part of that. US farmers have seen a signifi cant rise in their costs – in prices of fertilizers – because of a lack of inputs from OCP. The last thing that farmers should have to worry about is a diminished fertilizer supply.”

“We’re not opposed to competing,” responded Mosaic Senior VP, Benn Pratt. “We compete everywhere in the world we do business, but we need to compete on a level playing fi eld in our home market.” In March 2021, the US International Trade Commission ruled in favour of upholding the Department of Commerce’s moves. The countervailing duties are 9% for PhosAgro, 20% for OCP and 47% for EuroChem.

Potash

In late January 2021, Belarusian Potash Co. (BPC) surprised the international market when it signed a contract with India’s Indian Potash Ltd. (IPL) to supply 800 000 t of potash fertilizer at US$247/t, up US$17 from the US$230/t contract in 2020.

Nutrien and other potash suppliers expressed disappointment, saying the low price does not refl ect international market conditions. “The US has seen the strongest price rise so far, but Brazilian prices are now transacting at US$300/t,” said Magro. “We continue to fi ll our order book at higher price levels, and we are fully committed on domestic and international sales through April without positioning or selling volume to India or China. Our 2021 sales volume guidance is for 12.5 million to 13 million t and we expect to match strengthening market conditions.” In April 2021, BPC subsequently renegotiated the contract to US$280/t.

Mosaic noted that favourable grower economics have led to strong demand globally, which is expected to continue through 2021. The company expects to realise a US$20 – US$25/t improvement in average realised prices in 1Q21 over 4Q20, and benefi t throughout 2021 from improving pricing globally.

Organics

Commercial organic fertilizers are primarily derived from plants (alfalfa meal, compost, corn meal, cottonseed meal, soybean meal and kelp), and animal sources (manure, bird guano, blood meal, bone meal and fi sh products). Their advantages over conventional fertilizers include environmental benefi ts of production, as well as improved soil structure and secondary nutrients such as calcium and magnesium.

A strong consumer demand for organic foods is underpinning rapid growth. The worldwide commercial market for organic fertilizers is approaching US$7 billion annually, and is expected to exceed US$15 billion by 2025. In North America, sales exceeded US$1 billion in 2018, and they are expected to surpass US$2.4 billion by 2027. Key players include AgroCare Canada, ScottsMiracle-Gro and Anuvia Plant Nutrients, which recently launched its new organic fertilizer technology. The Florida-based company takes animal manure, food waste and agricultural by-products to create a crop treatment that delivers nutrients in timely fashion while storing carbon in the soil. The company has a 1.2 million tpy facility, and is raising capital to expand; its yield-improving product is already in use on over 1200 farms and it is aiming to treat 20 million acres by 2025.

Challenges

When the full impact of COVID began to emerge in 2020, the US Congress passed a US$2 trillion emergency aid package. The bill expanded the spending authority for the US Department of Agriculture’s Commodity Credit Corp. (CCC) by US$9.5 billion (the CCC is the primary federal vehicle for delivering aid to farmers). The legislation also included US$9.5 billion to aid livestock operations. In Canada, Prime Minister Justin Trudeau also announced the government would extend CAN$5 billion in new lending capacity through Farm Credit Canada to maintain farm cash fl ows.

Fertilizer companies in both North America and abroad were able to work with retailers and farmers to maintain the movement of product from plant to farms and, at the same time, maintain safety for all participants through digital marketplaces, social distancing and other practices. While disruptions to all sectors of the economy are anticipated to continue through 2021, the introduction of vaccine programmes is expected to alleviate many of the lockdowns and other restrictions that have had an impact on demand.

Trade confl icts between China and the US are expected to continue through 2021 under the new administration of President Joe Biden. The Phase One trade deal struck between the US and China in January 2020 included an agreement by the latter to purchase US$200 billion more of US goods and services, including US$32 billion in additional agricultural products over the next two years. Specifi cally, China would ensure an additional US$12.5 billion in 2020 over the baseline of US$24 billion in 2017 (for a total of US$36.5 billion), and US$19.5 billion in 2021 (for a total of US$43.5 billion). In 2020, China imported US$23.5 billion of covered agricultural products, one-third short of the target.

Environment

The manufacture of ammonia produces approximately 500 million tpy of greenhouse gas (GHG) emissions. The majority is converted into nitrogen fertilizers; producers are thus working continuously to reduce both intensity and overall amounts. A long-term solution to GHG emissions involves the production of ‘green ammonia’, which refers to ammonia produced through a carbon-free process, and blue ammonia, which relates to ammonia produced by conventional processes but with carbon dioxide removed through carbon capture and sequestration (CCS) and other certifi ed carbon abatement projects.

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Analysts predict that hydrogen could meet approximately 20% of the world’s energy needs by 2050, up from less than 1% today. Ammonia, which is composed primarily of hydrogen, is a highly effi cient transport and storage mechanism for hydrogen as well as a fuel in its own right.

In late 2020, CF Industries announced that it would build a 20 000 tpy green ammonia unit at its Donaldsonville Nitrogen Complex in Louisiana, US. An electrolysis system powered by renewable electricity will strip hydrogen from water to produce the green ammonia. The company is also working with thyssenkrupp, Haldor Topsoe and other high-technology companies to explore CCS and other carbon abatement projects. The eventual goal is to produce up to 3.5 million tpy of low-carbon ammonia, approximately one-third of its current capacity. In addition to making green fertilizer, the company is exploring ammonia fuel uses with utilities and maritime transportation providers. “The world needs clean energy and hydrogen is a key to meeting this need,” said Tony Will, President and CEO of CF Industries. “Low-carbon ammonia is the critical enabler for storage and transport of hydrogen and thus has a major role to play.”

CVR Partners is generating new carbon offset credits through nitrogen dioxide (NO2) abatement at its nitrogen fertilizer plant in Coffeyville, Kansas, US. In partnership with ClimeCo, the company installed a tertiary system to abate 94% of all NO2 in its nitric acid plant, approximately 450 000 tpy of carbon dioxide equivalent (CO2e). When added to its current NO2 abatement at its East Dubuque facilities, CVR expects CO2e reduction of over 1 million tpy. The projects are registered with Climate Action Reserve, a North American carbon offset registry that uses an independent third-party verifi cation process.

Conclusion

Several factors are causing prices for major North American cereal commodities to strengthen. Soybean prices rose from under US$8.50 per bushel in mid-2020 to above US$16 in May 2021; dry conditions in Brazil and Argentina hampered yields, and China went on a buying binge. In early 2021, wheat consistently traded above US$6.50 (reaching US$7.80 in early May) after languishing under US$5 for much of 2020; the rise is due to drought conditions in Russia and Argentina.

Corn prices have risen from under US$3.50 per bushel in May 2020 to over US$7.50 in May 2021 due to a temporary export cap in Argentina, lower expected output in Russia and rising demand in China. “We believe that China will need to rely more heavily on crop imports going forward as they transition their hog industry to professionally manage large-scale operations utilising feed rations as they rebuild their herds following the devastation caused by African swine fever,” said Magro. “We also see the potential for increased demand for crops in the future for use in biofuels to meet climate change objectives set by many countries around the world.”

In conclusion, food producers in North America are looking forward to a good year with strong commodity prices. Fertilizer suppliers are optimistic that farmers seeking to replenish their soils and cash in with higher yields will create strong demand for nitrogen, potash and phosphates throughout the year.