High natural gas prices are disrupting the global fertilizer market, and a number of chemical companies in Europe once announced the suspension of production and production cuts.
The Green Markets Weekly North America Fertilizer Price Index surged to an all-time high of $996.32 a tonne last week. Expensive fertilizers are bound to drive up farmers' production costs and further increase the risk of food inflation. Since the third quarter, many economies in Central and Eastern Europe and South America have announced interest rate hikes to cope with the challenges brought by inflation, and the prospects for economic recovery are facing a test.
Natural gas dominates the fertilizer rally
In Europe, which is deeply mired in the energy crisis, the irrational rise in natural gas prices in the early stage has hit European fertilizer production particularly hard. Austrian fertilizer producer Borealis previously announced a sharp cut in ammonia production, and the British government will provide financial support for local production by US chemical giant CF Industries to help it restart fertilizer plant operations.
Commodity broker StoneX Chemical analyst Lin Weir warned that at this rate, a ton of urea in Europe would cost more than $900 to produce. "Producers in one of our regions are disappearing, and that's a very big problem. They can't buy natural gas at the current price because it doesn't make a profit while producing fertilizer. In the absence of subsidies, their only option is to close, and that's what we see. ”
In the United States, on the other side of the ocean, the price of various types of fertilizers is also rising. Compared to last year, potassium salts led the way with a 92% increase, diammonium phosphate (DAP) rose 64%, urea rose 71%, for the first time in nine years to break the threshold of $600/ton, monoammonium phosphate (MAP) rose by 74%, refreshing a new high since December 2009, and urea ammonium nitrate solution (UAN32) with a nitrogen content of 32% rose by 78%.
In addition to natural gas, supply chain bottlenecks and geopolitical factors are also fueling this "perfect storm". The North American hurricane season not only had a serious impact on oil and gas production along the Gulf Coast, but also affected chemical companies, and the devastation of Hurricane Ida "Ida" that made landfall in late August forced CF Industries' plants in California to close, including six ammonia plants and five urea production plants, which lasted for more than a month. In June, the European Union introduced a series of new measures to impose targeted sanctions on the belarusian national economy, the country's potash exports were restricted, and the global market supply situation continued to tighten.
In the short term, the current round of global fertilizer price increases may not be over. StoneX expects fertilizer consumption per unit of crop consumption, which is already well above the five-year average, to continue to rise.
Dave Franzen, a soil science expert at North Dakota State University, believes nitrogen-based fertilizer prices will remain volatile until next spring. "In addition to Europe and the United States, as an important producer, since the third quarter, the export of fertilizers in Asia has also been seriously affected by energy prices such as coal, which has further exacerbated the global supply shortage. In addition to nitrogen-based fertilizers, it is recommended that farmers can consider a variety of fertilizer combinations. ”
David Widmar, an agricultural economist and co-founder of market research firm Agricultural Economic Insights, said the sharp rise in fertilizer prices would cause pain to farmers, but producers and consumers should properly assess the situation and actively communicate. He believes that the continuous rise in prices is not a good thing for both supply and demand, and at the current price level, it is difficult for farmers to continue to buy large sums, because once the price of natural gas falls and nitrogen fertilizer production returns to normal, high-priced fertilizers will become a huge burden, and fertilizer plants are also facing potential threats to production costs and inventories from energy price fluctuations.
An inflationary haze hangs over emerging markets
According to a report released by the Food and Agriculture Organization of the United Nations (FAO) on the 7th, driven by tightening supply conditions and strong demand for staple food commodities such as wheat and palm oil, the FAO Food Price Index averaged 130.0 points in September, up 32.1% year-on-year, a new high in nearly 10 years.
For emerging markets, the price alarm has long been sounded. Carmen Reinhart, chief economist at the World Bank, noted that the pandemic has significantly increased inequality and raised financial vulnerabilities. For developing countries, the impact of food prices and inflationary pressures on inequality is very important, and its potential impact on the economy is greater than that of advanced economies. "What you're seeing is a series of rate hikes in emerging markets aimed at coping with exchange rate volatility and pressure to limit inflation upwards." He said.
In order to cope with inflationary pressures, the tide of interest rate hikes has spread among emerging market countries, with Hungary and the Czech Republic in Central and Eastern Europe raising interest rates three times since the third quarter, and Brazil, the largest economy in South America, raising interest rates five times, driving Uruguay, Peru, Paraguay, Mexico and Chile in Latin America to raise benchmark interest rates. Data released by the Brazilian Institute of Geography and Statistics (IBGE) on the 8th showed that brazil's annualized inflation rate in September this year was 10.25%, a new high since February 2016.
However, the potential risks to emerging markets such as the surge in government debt during the pandemic should not be underestimated. Boris Schlossberg, macro strategist at asset management firm BK Asset Management, said in an interview with First Financial Reporter that although the September non-farm report was less than expected, it was still enough to meet the requirements of the Federal Open Market Committee (FOMC) for reducing the asset purchase plan, and it can be said that the time window for the reduction is approaching. For emerging economies, the impact of fed policy tightening can be divided into two aspects, starting with pushing up the dollar, which increases the cost of borrowing in emerging countries. Second, investors withdraw funds to the United States, resulting in serious capital outflows. At the same time, many emerging market countries issued dollar-denominated bonds, and in the environment of dollar appreciation, the pressure to repay began to increase. For fiscally fragile countries, interest rate hikes are often an important step in stabilizing their exchange rates, and they are also a no-brainer.
According to a report released by the United Nations Economic Commission for Latin America and the Caribbean, public debt in Latin America and the Caribbean as a share of gross domestic product (GDP) rose from 68.9% in 2019 to 79.3% in 2020, making it the most indebted developing region due to the impact of the COVID-19 pandemic. The World Bank's forecast for the region's economic growth rate for 2022 and 2023 was below 3 percent this month, saying the COVID-19 crisis could lead to a new "lost decade," a scenario that suggests there may be deeper structural problems in the region.
Schrosberg told reporters that compared with developed countries, the low interest rate space that emerging markets can afford is more limited, and interest rate hikes will greatly limit the scope of government policy choices. As things stand, only the fastest-growing emerging economies in Asia are capable of achieving debt stabilization under high government deficits. While interest rate hikes can effectively anchor inflation expectations, downside risks to future economic growth prospects cannot be ignored.