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Fertilizer crisis delivers profits and pain as Ukraine fallout broadens

‘It’s brutal. Farmers aren’t buying what they need; they are buying what they can afford,’ one expert said

The CF Industries fertilizer complex in Donaldsonville, La., on June 30. (Emily Kask for The Washington Post)

DONALDSONVILLE, La. — A powdery white residue coats the warehouse floor, all that’s left of almost 90,000 tons of nitrogen fertilizer bound for farms in the United States and around the world.

Nestled on the western bank of the Mississippi River, just down the road from the Square Deal Casino and the Cajun Daiquiri bar, this CF Industries fertilizer complex has been operating at full tilt for months. Customers in U.S. farm states and several foreign countries want their crop nutrients as fast as the company can load its ships, barges and rail cars and send them on their way.

For more than four months, the war in Ukraine has disrupted shipments of fertilizer and foodstuffs, plunging millions of people into hunger in some of the poorest countries on Earth, threatening to depress future harvests and challenging companies such as CF Industries to adapt to a new commercial landscape.

“There is a lot of tension in the market. … It has really wreaked havoc in the fertilizer market,” said P.J. Juvekar, a Citigroup stock analyst. “The fertilizer business has fundamentally changed.”

It’s also become vital for the global economy, as the world copes with a worsening shortage of food. Developing nations this year confront a “real risk” of multiple famines and 2023 could be even worse if fertilizer proves unaffordable, according to U.N. Secretary General António Guterres.

Hopes of averting widespread hunger rest on the ability of farmers to wring every last bushel of wheat, corn and soybeans from their fields. For that, they need adequate supplies of the nitrogen, phosphates and potassium solutions that help crops grow.

Yet soaring prices are imperiling farmers’ access to fertilizer just when it is needed most, forcing many in Africa and Latin America to substitute less potent alternatives or to alter their plantings in a desperate agricultural improvisation.

The war alone did not remake the global trade in chemicals and minerals that help farmers produce more food. But the European conflict intensified trends that were underway before the guns began blazing, such as increased hoarding by major producing nations like China and sharp jumps in the price of natural gas, the main fuel for the type of fertilizer that CF Industries produces.

Reduced shipments from Russia and Belarus, which account for nearly 25 percent of global fertilizer exports, have made a market that was tight at the outset of the fighting even tighter. The price of granular urea, the substance that filled the CF Industries warehouse here and the most widely traded fertilizer on global markets, jumped more than 70 percent in the first six weeks of the war.

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The market tumult, aggravating price pressures that began months before the war, forced producers in some cases to find new customers or new ways of supplying existing customers.

As CF Industries strained to operate at full capacity — ultimately setting a quarterly volume record — those higher global prices meant a financial windfall: $883 million in profits during the first three months of the year, almost six times the $151 million earned in the same period last year.

The company’s share price is up about 21 percentthis year, even as the stock market slumped to its worst half-year performance since 1970. Upheaval from the war also has left natural gas much more expensive in Europe than in the United States, giving CF Industries’ U.S.-centric operations a competitive edge over its European rivals.

“We feel very good about the position we’re sitting in today,” said Tony Will, the company’s chief executive.

‘Crisis is just beginning’

The volatile fertilizer market has been less kind to end users, especially in countries outside the U.S. that are more dependent upon imports, such as Mexico and Brazil.

Fertilizer adds minerals to the soil, making farms healthier and more productive. Often, fertilizer can make the difference between a disappointing harvest and a profitable one. Fields treated with nitrogen fertilizer, for example, yield 200 bushels of corn while those left untreated produce just 60 bushels, according to an Iowa State University study.

Russia and neighboring Belarus are major sources of nitrogen fertilizers, like those produced by CF Industries, as well as phosphate and potassium products that use minerals from surface and underground mines. Ukraine is a relatively minor fertilizer producer. But it relied on Russia and Belarus for much of its needs and future deliveries are now in jeopardy, casting a cloud over next year’s harvest.

Numerous countries in Latin America, Eastern Europe and Central Asia, meanwhile, rely on Russia for more than 30 percent of their imported fertilizer, according to the Food and Agriculture Organization of the United Nations.

Future harvests are at risk in sub-Saharan Africa, where before the war farmers applied much less fertilizer than the global average. Now, short supplies and near-record high prices mean they use even less, according to the U.S. Department of Agriculture.

“The global outlook for 2023 may be even more dire. As the Russia-Ukraine war continues and the supply of fertilizer remains limited, high prices are likely to have a more profound impact on 2023 planting decisions,” the department’s Foreign Agricultural Service concluded in a report last month.

In the West African nation of Ghana, which buys half of its fertilizer from Russia, retail prices are more than five times higher than they were last year, prompting some corn and yam farmers to abandon chemicals in favor of cow dung and chicken droppings, even though that means lower crop yields and the risk of hunger.

Mumuni Baba, 36, said he could afford to plant only half of his 40 acres this year. He’s also switched some of his corn fields in Sagnarigu, northern Ghana, to soybeans and groundnut, which do not require fertilizer.

Baba has been tilling the fields for a quarter century. But he has never seen a time like this.

“Life in general has become very difficult. … It’s killing our business,” he said.

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If Ghana’s harvest this year falls short, the country will need to import corn from Brazil, said Alloysius Attah, CEO of Farmerline, which connects African farmers with seed, fertilizer and financing.

But with its currency having lost more than 16 percent of its value against the dollar since the war’s start, the Ghanaian government will struggle to pay for food imports without aggravating a chronic budget deficit.

“It’s brutal. Farmers aren’t buying what they need; they are buying what they can afford,” said Attah. “I’m hearing some people are not even farming this year.”

The smaller harvests of corn, wheat, rice and soybeans that are likely to result from reduced fertilizer use (under a “pessimistic scenario") would represent over 160 trillion calories, enough food to feed around 200 million people for one year, according to Gro Intelligence, which this month introduced an online tool for modeling the impact of fertilizer shortages on individual nations.

“The fertilizer crisis is just beginning,” said Sara Menker, Gro’s CEO. “This is going to be a multiyear crisis. It’s not one-and-done.”

U.S. has edge on natural gas

Sprawling across 1,400 acres, the CF Industries complex here is a warren of pipes, furnaces, cooling towers and storage chambers. The facility uses natural gas to produce ammonia, which is then upgraded into a variety of fertilizers: urea, ammonia nitrate and nitric acid.

The process calls for managing extremes. In one corner of the site, substances are heated to 1,400 degrees. Elsewhere, they are cooled to 28 degrees below zero for storage in massive aboveground tanks.

The facility boasts numerous links to U.S. and global markets, reflecting Donaldsonville’s origins in 1750 as a trading post. Fertilizer travels to customers on 700-foot vessels that call at two deepwater docks, via rail cars or through a 2,000-mile pipeline that reaches seven states.

“We’re unique in the chemical industry in that everything we make ends up in the ground,” said Morris Johnson, general manager of the Donaldsonville complex.

The shale gas revolution over the past decade made U.S. fertilizer production among the lowest cost in the industry.

What determines CF Industries’ fortunes is the difference between the price of natural gas here and in Europe. So even as U.S. natural gas prices rose, the increase was dwarfed by the enormous jumps in Europe, which were fueled by fallout from the war.

Natural gas prices in Europe prompted some plants in Italy, France and Romania to temporarily halt production. CF Industries shuttered one of its small plants in the United Kingdom.

That made basic ammonia much more profitable than usual, especially relative to urea. As the gap between European and U.S. gas prices in dollars roughly doubled, CF Industries executives adjusted their product mix — making more basic ammonia and less urea — to capitalize on the shifting economics.

“What’s happened as a result of just some of the evolving trade flows is that our mix has shifted, has changed a little bit,” Will said.

With more ammonia to ship than usual, Will sent a record number of rail cars racing to inland terminals and chartered three times the usual number of vessels to bring product to the East and West coasts.

The ships, laden with urea ammonium nitrate liquid, replaced Russian fertilizer imports, which had been blocked by new tariffs CF Industries had petitioned the Commerce Department to impose. The company alleged Russia and Trinidad and Tobago had improperly subsidized or sold in the United States below their costs.

Yet, even as fertilizer prices hover at unusual levels — and domestic fertilizer production enjoys an edge over European alternatives — there is little prospect of CF Industries adding to its capacity here.

The Donaldsonville complex has been upgraded several times since it opened in 1966. The most recent overhaul, a $2.5 billion project completed in 2017, expanded output by 50 percent.

Building a new ammonia plant is a multibillion-dollar investment that would take at least four years to come to fruition. Market conditions can shift dramatically before it even opens, company officials said.

Plus, the fertilizer industry faces the same imperative to become more environmentally friendly as any other part of the petrochemical sector. CF Industries’ major new investments are in plants that will rely on renewable energy sources rather than natural gas, or would capture the carbon emissions from using gas and sequester them underground.

‘Another black swan’

The war in Ukraine had a near-immediate impact on exports of Ukrainian and Russian grains through the Black Sea, where ports were shelled and ships sunk. Tons of Ukrainian wheat were effectively trapped in storage facilities in the country’s south, blocked from foreign markets. That’s left many countries, especially in North Africa and the Middle East, scrambling to secure alternative supplies while struggling to increase production at home.

Obtaining enough fertilizer to do that hasn’t been easy.

In April, the European Union also imposed restrictions on Russian fertilizer imports, which took effect July 10. Lloyd’s Joint War Committee, which represents insurance underwriters, added Russian waters to its formal list of areas requiring vessel owners to notify their insurance carriers of planned voyages. The pricey maritime insurance required to enter such areas raised the cost of cargoes that can get exit Russia via a Crimean port or St. Petersburg in the north, discouraging some potential buyers.

Some customers also shied away from Russian cargoes for fear of violating U.S. financial sanctions, even though U.S. officials had said such shipments were not prohibited.

Linda Thomas-Greenfield, the U.S. ambassador to the United Nations, said in late May that Washington wanted to encourage “companies who are holding back on shipping of Russian grain and fertilizer” to proceed.

The Treasury Department would provide so-called “comfort letters” for shippers and maritime insurance companies, making clear that the U.S. did not object to such shipments, she said.

Such reassurances, coupled with Russia’s financial needs, explain why Russian fertilizer exports continue to flow.

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Despite initial fears, Russia this year is expected to ship at least 5.8 million tons of urea to global customers, according to Chris Lawson, head fertilizer analyst for CRU Group. That estimate, which is likely to be revised up, is down from last year’s 7 million tons, he said. But the decline is minor for a global market that sees about 49 million tons of the product traded annually, he said.

“We’re seeing some changes in trade flows and relationships,” Lawson said. “But it hasn’t been nearly as bad as anticipated for Russia. We’re still seeing a decent flow of product exiting Russia from Baltic and Black Sea ports.”

Still, market pressures are keeping fertilizer prices elevated. Though urea, for example, has dropped more than 40 percent from its April high, it remains roughly twice its pre-pandemic level.

Meanwhile, China continues to block its exports of urea, fearing higher prices and shortages at home. Chinese exports of the nitrogen-based fertilizer in May were 86 percent below figures from a year ago, before the ban was imposed, according to JPMorgan Chase.

“The Russia-Ukraine conflict is another black swan in a pond full of black swans,” said Josh Linville, head of fertilizer for StoneX, a commodity brokerage.

A squeeze in Latin America

In Colombia, skyrocketing fertilizer prices follow two years of the weather pattern known as La Niña, whose punishing rains were responsible for last year’s disappointing coffee crop, said Hugo Gomez, director of land and rural development programs for Mercy Corps in Bogotá.

His efforts to encourage smallholder farmers to switch from growing coca plants for the illicit drug trade to planting legal crops such as coffee have been stymied by the latter’s thirst for fertilizer.

As poor farmers balk at the cost of using so much expensive fertilizer, acreage devoted to coca cultivation is expected to jump by 30 percent and many young people are expected to abandon rural areas for the cities, he said.

Colombia, and its Latin American and Caribbean neighbors that depend on Russian fertilizer, have suffered the highest rates of food price inflation in more than 10 years.

In June, the U.S. Agency for International Development announced $331 million in funding to boost food security in the region, including by aiding farmers in Colombia, Guatemala, Haiti, Honduras and Peru improve productivity and withstand the impact of high fertilizer prices.

Edwin Salazar, 37, a farmer in Cauca in southwestern Colombia, a region that has suffered chronic drug-related violence, eradicated his coca plants last year and switched to coffee. Mercy Corps helped by absorbing some of his fertilizer and seed costs. But it’s still been an expensive transition.

“Food and fertilizer prices have increased significantly in the last months,” he said. “Most families don’t know what they are going to do. Farmers need to apply fertilizer every three months, which becomes very expensive, but plants need it to grow stronger.”

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