Transcription
Westin: This is a story about the other shoe dropping. The war in Iran has sent the price of oil and natural gas soaring, putting pressure on just about everyone from central banks trying to deal with inflation.
The economics effect could be bigger. They could be smaller. They could be much smaller or much bigger. We just don't know.
Westin: To people filling their tanks at the gas station.
-Before the gas prices went up, I could fill my car up for like 30, 35 dollars. Now it's costing me right at 60.
Westin: But the Strait of Hormuz isn't just affecting energy prices. It's also hitting farmers who need fertilizer for the crops they're about to plant.
-What's happening to farmers right now is a double whammy at a time when they're very vulnerable.
Westin: Our special contributor, Chrystia Freeland, who was among those who spotted the fertilizer problem as soon as the war began.
-I am a farmer's daughter, and I'm also a former foreign minister and a former finance minister. And one of the first things I thought when this war started, and when it was clear that Iran was going to be blocking the Strait of Hormuz, was, "Oh, no, what's going to happen to the farmers?"
Westin: Fertilizer accounts for about 25% of the total costs of farmers of row crops such as corn and soybeans. And since the war with Iran began, prices for nitrogen-based fertilizer have risen dramatically.
-We have seen a major impact on global nitrogen phosphate values.
Westin: Josh Linville is vice president of fertilizer at financial services firm StoneX.
-Of course, as most farmers will tell you, those prices have skyrocketed. And it's based on the fear of a lack of supply that's out there. We have seen because of the shutdown of the Persian Gulf, the global S&D for nitrogen and phosphate as well, which isn't getting as much traction, not as much attention. We are seeing both of those get extremely tight. So everybody is talking about the oil and the gas and everything else that flows through there. Few people know, urea being the most commonly traded nitrogen product of the world, about a third of the world's product flows through that Strait of Hormuz. When you look at the top 10 list of global urea exporters, three of them sit behind the Strait of Hormuz. That's Iran, that's Qatar, and that's Saudi Arabia. Those three nations represent 3 of the 10 largest anhydrous exporting nations. And even on the phosphate side, not a lot of people understand this. Saudi Arabia is one of the world's top five exporting nations for phosphate exports around the world. And again, all of these products are stacked up and backed up in production and suffering until the Strait of Hormuz is reopened to save traffic.
-Farmers are very affected by the price of fertilizer. Fertilizer accounts for, you know, about 25% of the costs for a farmer. And this is happening just at seeding time as they're getting ready to plant their crops. And it's happening at a time when farmers have been really beaten up. The trade wars have been really hard for farmers, for American farmers, I should say. COVID was really, really hard for farmers. And Russia's invasion of Ukraine and the economic impact was really hard for farmers. So they've been having a hard time. And then on top of that, you see the price of fuel, the price of fertilizer skyrocket at a time when you're just, you know, going into your shop, looking at your seed drill, checking that everything works, getting ready to get out in the fields.
Westin: U.S. farmers' need for fertilizer is so great that they're allowed to import it even from Russia, the largest exporter of nitrogen fertilizers in the world. But they have nevertheless been hurt by geopolitical events thousands of miles away.
-So you've got to be able to move it in a cost-effective manner at scale.
Westin: Tom Halverson is CEO of CoBank, which provides financial support to farms, cooperatives and agribusinesses.
-At the same time, rural Americans in general and farmers in particular are not immune from macroeconomic conditions, including inflation, for example. They are incredibly exposed to trade, buying and selling internationally. Producers have been squeezed quite dramatically over the last, you know, 12, 18, 24 months by a combination of lower commodity prices for what they sell, on the one hand, and significantly higher prices for the inputs, you know, be it fertilizer, seeds, chemicals and things of that nature. And therefore, economic conditions are tougher than they have been, you know, until you go back to the 2018-2019 period when we had our first trade conflict in general, but particularly the one we had with the Chinese.
Westin: And when the costs go up for farmers, the price of food cannot be far behind, with all that means for inflation.
-Higher fuel prices automatically translate into higher food prices. Higher fertilizer prices automatically translate into higher food prices. And, you know, the thing that I think is especially challenging about that is the geopolitical and the political consequences. You know, a lesson that I think I really learned during COVID and during the inflationary aftermath of COVID was what a huge and unpredictable political impact the price of food can have. The people who are hurt the most are the most vulnerable. The people who are the most vulnerable in the world, and that is the global South, and the people who are the most vulnerable in our own countries. So, you know, that means in the United States, people for whom food is a really big part of their budget.
Westin: Since the war between the U.S. and Iran began on February 28th, we've already seen the consequences start to reverberate around the world. Just a week into the war, the price of urea rose by 19%. And with each day, those consequences spread and grow.
-It's come in waves. And the way that we've looked at it from a supply standpoint, we woke up Saturday morning to the news that this attack had happened. From that point on, we knew vessel traffic was going to stop because you've got to wait until safe passage. The ship owners weren't going to put their crew in their vessel at harm's way. And so we knew that if this lasted several days, we were going to have a shipment problem. But we could solve that in relative short order if we kept it to say 3 to 5 days after we moved past that period. Now we started to wonder, "OK, we're losing some of the most important shipment times of the entire year from this situation." And we had to start worrying about what's the impact on production, because storage is finite in that part of the world. We finally started to see it come true. We started to see oil and gas production go down. We started to see nitrogen production go down because they had nowhere else to go with these tons until the vessel started to move again. Well, here we are in the third week. And, unfortunately, this has broke out. And we're starting to see the tentacles of the story start reaching out to other parts of the world. And what I mean by that, it is no longer just a nitrogen phosphate Persian Gulf Strait of Hormuz story. Now it's moved to natural gas. A lot of the world's natural gas flows to the Strait of Hormuz. And why is that important? India, for example, is the world's second largest producer of urea. A lot of their gas input for their domestic nitrogen production facilities comes from the Middle East. Their production rates are falling drastically because they don't have the input to produce that finished good. In fact, you're hearing stories about, you know, cooking gas being hard to come by and prices skyrocketing as they are. So you're seeing major global manufacturers starting to be impacted.
Westin: Linville says that even if the war were to end immediately, there would be a delay in getting fertilizer to the people who need it, like U.S. farmers. And that delay comes at a critical moment.
-It's timing. Take the U.S. market, for example. Our single biggest month for urea imports is the month of April. And you might be thinking, "Well, that's OK. We're not in April yet, right? We're middle of March." We still got time. But vessels don't just show up overnight. If somebody snaps a finger, they get a wish and everything is done, we can start loading vessels immediately. And the very first vessel is going to point to the U.S. market. It's going to take a couple of days to fill that vessel and get it pushed back out to sea. And it's going to take about 30 days in total between loading and arriving to a U.S. shore. And as of today, middle of March, that means the first vessel does not arrive until the middle of April. And then you take it further. That's just on the U.S. shore. For most farmers, that doesn't help you. Now you need to move that product from that shore into the inland market where the farmer get their hands on it. That's another two, 3, 4 week process, again, depending on where you are. So all of a sudden we're talking we're in the middle of March, those tons, if they were to ship today, don't arrive until the middle of May. And for most farmers out there, that's too late.
Westin: Given the pressure on farmers from the war and its effects on fertilizer, the question remains how to respond and what comes next. If I'm a row crop farmer somewhere in the Midwest, pick a state, Iowa, Nebraska, Kansas, what are my options? Are there any waves for me to hedge at this point?
-There are NOLA, Urea UAN and DAP phosphate futures that the CME trades daily. That's a big part of what we do. But unfortunately, those paper products, it's not going to help solve the supply situation that we are in today. Unfortunately, where we are with so little time between today and planting and basically moving on from planting into spring, we're out of time.
Westin: With more time to plan, farmers might change the crops they plant, moving away from those like corn that need nitrogen-based fertilizer. But it's getting late in the season for that.
-They'll be getting scared. One of the things that is going to be particularly hard is the mix of costs of different fertilizers has an impact on what you should be seeding. And that, you know, this unexpected event makes that kind of planning for farmers really, really difficult. And, you know, we are at the end of March. That's not a really good time to change your plans for what you're going to seed.
Westin: One solution might come from closer to home. Nitrogen-based fertilizers like urea are not the only options available. U.S. farmers also rely heavily on fertilizers like potash, much of which comes from Western Canada. Pam Schwann is the president of the Saskatchewan Mining Association.
-Potash is one of the main fertilizers that's used to help make crops healthy and grow larger yields. So as the world grows to 10 billion people by 2050 on less arable land, we need to be able to grow crops more effectively and more efficiently that have higher crop yields. So potash is one of those 3 ingredients, along with phosphorus and nitrogen that make crop yields much improved.
Westin: What is the role of potash in Canada's economy?
-It's very significant, particularly in Saskatchewan. 100% of all the potash produced in Canada is produced in Saskatchewan. Very little is used in Canada and very little in Saskatchewan. So there's probably over 98% of what is produced in Canada. And again, all in Saskatchewan is exported to global markets. So of that, about 50% goes into the United States to help farmers there grow corn, soybean and oats, and the rest is exported out to countries like China, India, Indonesia and Brazil are probably the main customers.
Westin: Fortunately for U.S. farmers and for Canada's miners, Canadian potash has been kept free from tariffs, something former Deputy Prime Minister Freeland considers wise for all concerned.
-Two of the world's other leading potash producers after the full scale Russian invasion of Ukraine. So I'm going to offer a little Canadian editorial here, a particularly bad time to have a trade war with Canada. There are lots of reasons a trade war with Canada is a bad idea. You need Canadian aluminum, for example, for U.S. manufacturing, and aluminum is basically electricity in solid form. But the fact that Canada is such a major producer of potash is another good reason that we're a great trading partner.
Westin: Fertilizers like potash may be somewhat protected from the Iran war, but they're not a perfect substitute for those nitrogen-based fertilizers coming through the Strait of Hormuz. And although prices of any commodity, including fertilizer, go up and down, for those who have spent their careers dealing with the fertilizer market this time may truly be different. How does this compare with prior sort of crises, supply chain crises we've had?
-It doesn't. This is brand new. We have never experienced anything like this in the fertilizer market. I've been at it for 24 years now. I've never seen anything like it.