Series: Agriculture
Tags: fertilizer, inflation, natural gas, crop, transport
World fertilizer prices climbed in 2021 for several reasons, including high energy prices, high crop prices, and Russia and China limiting fertilizer exports. In 2022, the war in Ukraine caused additional disruptions such as soaring energy prices and countries, including Canada, imposing tariffs on the import of fertilizers from Russia and Belarus.
Fertilizer prices have declined since the beginning of the summer. Will that trend continue? There is evidence of lower prices because farmers are cutting on their purchases. But, with reduced fertilizer production in Europe from high natural gas prices and high barge rates on the Mississippi River, fertilizer prices might start growing again.
I was curious to learn the main factors impacting fertilizer prices in Canada. To that end, I estimated two models of fertilizer prices. I also use them to forecast prices for the next six months.
The best data I’m aware of regarding fertilizer prices in Canada come from Alberta’s Ministry of Agriculture and Irrigation. The monthly data track starting January 2012 the price of Anhydrous ammonia (82-0-0) full service with applicator, Urea (46-0-0) and Fertilizer (11-51-0). Figure 1 shows the data. Prices were relatively steady before 2021, grew rapidly starting in summer 2021 and peaked in May 2022. Data are missing for three months in 2020 because of the pandemic.
Fertilizer markets in Canada are split between the Western and the East. Western Canada relies on fertilizer imports from southern United States that travel to Canada by barges, trains and trucks. Eastern Canada imports fertilizers by boats from several countries, including Russia. Fertilizer needs are different between the two regions as they plant different crops.
I’m sure there is a certain level of integration between the Eastern and Western fertilizer markets. They appear, nonetheless, different enough that what we learn about the Western fertilizer prices will not entirely translate to the Eastern market.
Several regional and global factors affect fertilizer prices in Alberta. Below I discuss the variables I identify as potential drivers and that I’ll be including in my models. The variables are similar to those identified in this Outlook for nitrogen prices in Spring 2023 published in farmdoc daily recently.
As Canada imports fertilizers from the United States, a lower exchange rate means higher prices in Canadian dollars. The models include prices in US and Canadian dollars, and the Canada-US exchange rate and I let the model select the most relevant variables. In the case of the Dutch TTF natural gas futures, prices are included in Euro and in Canadian dollars.
The demand for fertilizer is strong when corn prices are high as corn production asks for a lot of nitrogen. Corn prices are also meant as a proxy for crop prices that drive the demand for fertilizers.
Energy is an important input in the production of fertilizers, especially for nitrogen because natural gas is the main feedstock. I include energy prices for the United States and Europe.
West Texas Intermediate (WTI): price of oil in the United States
Brent: price of oil in Europe
Henry Hub natural gas: price of natural gas in the United States
Dutch TTF natural gas: price of natural gas in Europe
As fertilizers move north by barges, trains and trucks, transport costs could be important drivers of fertilizer prices in Canada. I use downbound grain barge rates from St. Louis as a proxy to the upbound barge rate on the Mississippi River. I did not find data for upbound rates but as barge transportation upbound and downbound face similar challenges I expect their prices to be highly correlated. Figure 2 shows how the barge rate on the Mississippi River have exploded lately.
I built a proxy for rail costs based on rates for grains going from the Dakotas either to Texas or Louisiana. This is in the opposite direction that fertilizers flow but the rates are likely correlated.
The models include also variables for seasonality and a variable for the imposition of a 35% tariff on the import of fertilizer from Russia.
I do not want to bore you with the technical details. For those interested, I’ll just say that based on the variables discussed above, I created several other variables to capture dynamics and that I estimated elastic net models to shrink the data to identify the most important drivers.
I show the results for two models: 1) without Europe energy prices and 2) with Europe energy prices. Oil prices in North America and Europe are highly correlated but it’s less the case for natural gas prices.
Figure 3 shows the relative importance of the top drivers of fertilizer prices. In all cases, the price last month is the best predictor of the price in the current month. That’s not surprising as storage means that prices are correlated through time. I expected the price of corn to be an important driver and indeed it’s one of the most important variables in all models.
I was surprised that barge rate on the Mississippi River is an important driver of fertilizer prices in Alberta. In all cases, barge rate last month or two months ago is one of the main drivers. I was also surprised that there are significant differences between the models with and without Europe energy prices. The models with Europe energy prices show that the price of natural gas in Europe is an important factor for Alberta fertilizer prices.
The models also show that there is no seasonality in fertilizer prices and that the tariff on imports from Russia is not important to fertilizer prices in Alberta. However, that is likely not true for fertilizer prices in Eastern Canada.
One technical note for my academic friends who might point this out. Although I’m calling these variables drivers of Alberta fertilizer prices, the models do not allow to identify causality. The models identify the variables that best explain Alberta fertilizer prices through correlation. Identifying causality is a much more arduous job and it might not even be possible.
I was hesitant to publish the forecasts below. It’s always risky to make forecasts, especially with a new model, and to show forecasts that go against the recent trend. Indeed, fertilizer prices have been declining in Canada and there are signs that US fertilizer prices are down. Another source of concerns is that empirical models do well within the ranges variables have been observed historically. Barge rates on the Mississippi increased to historical highs and we do not have a reference that tells us the impact of such rates on fertilizer prices.
You’ll see in the figure below that the models forecast fertilizer prices to climb steeply, to levels that are hard to believe. I don’t expect prices to go as high as the models forecast but I think it’s fair to say that conditions are there for Alberta fertilizer prices to increase in the next few months.
A few words on the assumptions behind these forecasts.
They assume that exchange rates, oil prices and rail rate stay at their November averages thus far;
Natural gas and corn prices follow their respective futures forward curves;
Three scenarios for barge rate:
Constant: the barge rate stays at its November value.
Declining: the barge rate declines by 25% by month such that it goes from $60/ton in November to $11/ton in April 2023.
Increasing: the barge rate increases 5% monthly.
Figure 4 shows that under all scenarios fertilizer prices increase for the rest of 2022. That’s the case because it’s the barge rate last months and two months ago that correlate with Alberta fertilizer prices. As barge rates have been at record highs in September and October, their impacts will propagate until the end of the year. In the scenario with a declining barge rate, it’s not until early 2023 that we start seeing fertilizer prices decline.
The latest data show that barge rates have declined in the first two weeks of November. If that trend continues, the November barge rate I use is too high and thus that the forecasts below are too high. Nonetheless, the barge rate should still be high and we should expect Alberta fertilizer prices to increase from the higher barge rates from September to November.
The price of natural gas (both Henry Hub and Dutch TTF) peaked in August. This will contribute to higher fertilizer prices in the coming months. The good news is that natural gas prices have dropped in half since peaking, which will help reduce fertilizer prices later.
The model does not consider inventories. Figure 5 shows fertilizer inventories in June for the last three years. Inventories are strong in the Western provinces but low in Eastern provinces for ammonia. High inventories in Western Canada could help limit the impact of the surge in barge rates on the price of fertilizers in Canada.
I would have liked to investigate the drivers of fertilizer prices in Eastern Canada but the lack of data does not make it possible. What we learned about Alberta fertilizers may not apply to Eastern Canada because of the distinct eastern and western markets for fertilizers in Canada. If you know of data I could use, especially over several years and at a monthly frequency, please share them with me.