While much of the world has been focused on the war in Iran’s impact on the energy sector, another arguably more impactful market has been largely overlooked: fertilizer.
The global fertilizer market is in a precarious spot. Roughly a third of the world’s seaborne fertilizer trade goes through the Strait of Hormuz. Even before the war in Iran began, China, the world’s top phosphate producer, halted exports of the crucial compound. As a result, the longer the strait remains closed, the more the threat to our global food supply escalates.
In this episode, Shayle speaks with Josh Linville, vice president of Fertilizer at StoneX, to make sense of the global fertilizer market and its cascading impacts.
Shayle and Josh cover topics including:
- The current state of global fertilizer markets
- The tenuous relationship between natural gas prices and the cost of producing nitrogen-based fertilizers in Europe
- How stalled shipments of fertilizer could impact supply and demand for next year’s planting season
- The impact of Chinese phosphate export restrictions on the global market
- How a prolonged closure of the Strait could impact food supplies around the world
Resources
- Josh Linville’s X account
- Open Circuit: Iran, energy shocks, and the case for distributed power
- Latitude Media: DOE’s second ‘Energy Dominance’ loan was reworked to embrace coal
- Latitude Media: This isn’t demand destruction. It’s rationing.
Credits: Hosted by Shayle Kann. Produced and edited by Max Savage Levenson. Original music and engineering by Sean Marquand. Stephen Lacey is our executive editor.
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Transcript
Shayle Kann: I’m Shayle Kann. I lead the early stage venture strategy at Energy Impact Partners. Welcome to Catalyst. So it’s been, as of this recording, a little over ten weeks since US and Israeli airstrikes hit Iran and a little over ten weeks since the Strait of Hormuz effectively shut down. Most of the energy world has been focused on what that means for oil prices and LNG flows, and all of that matters obviously. But there’s another story unfolding in parallel that for a lot of people, both in the United States and globally, might actually end up being the more economically consequential one. It’s what’s happening to the global fertilizer market. Up to a third of the world’s seaborne fertilizer trade transits the same choke point as the oil. Three of the top ten global urea exporters, Qatar, Saudi Arabia, and Iran sit behind the strait. Roughly half of the world’s tradable sulfur supply originates in the Persian Gulf and by some accounts a million tons of finished urea is sitting on vessels right now unable to get out.
A barge of urea at New Orleans was trading in the high 400s the day before the war started. The high trade since then has been about 700. At first glance, this kind of seems like a textbook commodity shock: the strait closes, prices spike, prices settle when shipping reopens, life moves on. But I’m actually not sure that’s the right frame. This isn’t a single shock story. It’s a stacking shock story. China has been almost entirely absent from the urea and phosphate export market for months now because of their own export ban that technically runs through August, though we’ll see. Europe is still running nitrogen at around 75% of capacity because of gas costs that have been high tracing back to 2022 and the Russian invasion of Ukraine. The world’s largest producers were basically already walking into this Hormuz crisis with almost no shock absorption to give and there’s no strategic fertilizer reserve.
So the global system was, to borrow a phrase from my guest today, already living on a razor’s edge. It’s a little bit scary. So to walk through where all this goes from here, I was joined today by Josh Linville. He’s the vice president and fertilizer at StoneX and as you will soon see, a deep expert in these markets. That’s all coming up after the break.
Shayle Kann: Josh, welcome.
Josh Linville: Hey, thanks for having me on. Fertilizer market’s got a few things to talk about.
Shayle Kann: That’s how I understand it to be. Let’s do it. Start with what’s been going on over the past ten weeks since the US invaded Iran. What’s happening in the fertilizer market at the high level?
Josh Linville: We as a market have experienced a supply tightness that we’ve never seen in the history of our markets. Now, we’ve had periods where supplies have gotten snug. We’ve seen situations where prices have gotten high, but nothing ever to this extent. And it’s all surrounding the Strait of Hormuz, or so the market likes to think. The problem is, if you go back to January one, nitrogen markets and phosphate markets were already dealing with supply tightness because of European production rates, because of a lack of Chinese exports, because of the ongoing Russian-Ukraine war. The Strait of Hormuz was just that shot of adrenaline that nobody really needed. So it’s a period that we’ve never seen in this marketplace. We’ve always theorized, but it’s always one of those tongue in cheek, like who in the world would ever think the Strait of Hormuz was going to shut down for ten, eleven weeks?
But here we are and we’re just trying to get through it and trying to kind of transition from the spring season to the summer season and figure out how’s all this going to play out.
Shayle Kann: So there’s a lot to unpack there because I think you made one key point, which is this is about the Strait of Hormuz, but the Strait of Hormuz was maybe like a straw that broke the camel’s back kind of situation and the market was already tight before that. If I could take a big step back, I think I, as well as many of our listeners, are pretty familiar with energy markets and less so with fertilizer markets. Is the fertilizer market similar to the energy market in that individual countries may have stockpiles and there’s a pretty dynamic trade that you’ll have countries that are net importers, others that are net exporters, some are self-sufficient, some are not. Orient me in how the global fertilizer market actually works.
Josh Linville: I would say they mirror in a lot of the ways you just mentioned, except there’s not strategic reserves. That’s one of the things that actually has been talked about quite a bit. Since all this is broken loose from a US perspective, people are like, “Well, we need to have a fertilizer, strategic reserve like we have with oil.” The problem is when you look at oil, it’s a much, much easier product to store for years, for decades, assuming you do it correctly. Fertilizer just does not store that well. It breaks down very quickly. And there’s always a question of like, well, where does it go to? If you ever need to call on it, who gets it at what price and how does it get there? And so it’s just not something that really makes sense. Now, a lot of the countries around the world, US included, have a tremendous amount of storage already built in through their retail network and a growing farmer network.
So it may not be something that’s government controlled, but there is a lot of storage that’s out there and that’s the one thing that helped out North America. We are self-sufficient on potash from a Canadian standpoint. They are the biggest producer and exporter in the world. We are mostly self-sufficient on phosphate as the spring season has shown. UAN and hydros, both nitrogen products, we produce almost all that we need here in the North America marketplace. Urea is the one that we need the most imported. We are nowhere near self-sufficient. Fortunately, when all this broke loose, we already had a tremendous amount of that import on its way or already here in storage. So the North American marketplace has been able to kind of get away from this whole situation, has been able to weather the storm. It’s other parts of the world that we’re much more concerned about.
Shayle Kann: So that’s also kind of true in oil and gas world as well, where we’ve been a little bit more resilient because we’re a net exporter in that space than you see in other countries. So give me a sense, I mean, you said we’ve experienced a version of supply tightness that we have never seen before in the history of these markets. How has that manifested? Give me an example of pricing or shortages, like what has happened as a result?
Josh Linville: The best thing to show as far as talk about that’s actually living proof of it is India. Now, India is a little bit of a different beast. A lot of the world’s farmers have to ebb and flow their demand based on where prices are because their price is a direct correlation reflection of what the world market is. Indian farmers, they don’t care what’s going on around the world. Their price stays low and steady and that’s dictated by the government. And what the government does is they subsidize the price difference between that farmer and the rest of the world. So their demand doesn’t move because they just don’t care. They paid one of the highest prices we’ve seen in a very, very long time here recently to buy two and a half million tons. Over $900 a ton, I think the West Coast prices were $935 a ton.
East Coast prices were 950 plus, an incredibly high price, but they were still able to find the product. What we’ve been watching very, very closely is countries like Australia. Now again, I’m not going to say … I was about ready to say fortunately for their drought, because that’s not the right way to say it. Their drought has been terrible, but from a strict fertilizer standpoint, their demand has been much lower because the farmer’s saying, “I’m not getting rain. I’m not going to invest in the fertilizer.” If that rain were to come, they are going to experience shortages because that product just isn’t in place. We’re watching for Asia. We think that’s going to be an area that’s going to be very, very snug. Eastern Europe, that area is going to be very, very snug. The longer this continues, now it starts to manifest itself in places like Africa, like in South America, because they’ll be the next ones up to start buying this product.
So fortunately, through all of this, we’ve not heard anybody really jumping up and down saying, “I cannot get my hands on product.” At the right price, you can find it. We’ve not heard of true shortages. The longer this goes on, the more likely that is to happen.
Shayle Kann: Right. So we’re in this situation where fertilizer prices and then assuming that gets passed through food prices ultimately are inflationary because fertilizer prices are higher. We haven’t yet reached the food shortage phase that we might see if things continue. I do want to go back and talk through all those dynamics that you listed out. So let’s do this. Let’s talk about the pre-hormus list of things that was causing supply tightness and then I want to talk about Hormuz and the impact that it has had. So pre-Hormuz, you mentioned one, which is China. So what’s China’s role in the global fertilizer supply chain and what changed there recently?
Josh Linville: Historically speaking, China is the world’s largest phosphate exporter and it’s not even a close second. From a nitrogen standpoint, from a urea standpoint, they are typically the world’s second or third biggest exporter. And from my vantage point, now I do think that there’s some domestic production situations they’re going through. They’re trying to clean up their environment. They’re dealing with some input, supply problems, things like that. But I think China has figured something out. Now, this is my very naive elementary viewpoint of the world, but everybody talks about, oh, the biggest dangers to communism. It’s the US invading them. It’s this, it’s that. My point of view is it’s none of those things. Communism’s biggest fear isn’t uprising by their own people. Well, according to Google, about a quarter of their population is tied to ag. So if they’re a net exporter of urea, if they’re a net exporter of phosphate, why not stop those exports?
In doing so, you’re keeping domestic supplies tight when the west of the world is struggling and you’re keeping your domestic price low because you’ve basically flooded your own marketplace. You’ve just made a quarter of your marketplace thrilled beyond any measure of a doubt because they are some of the most competitive farmers in the world because of those low prices. And I think the government has seen that and they’ve just continued to sit there and say, “We’re going to keep these exports at bay.” Yeah, we can make more money if we export it and the income flow would be great, but it’s a rounding error in the China GDP. It’s more important to keep a quarter of your people happy. So they’ve continued to keep them … The last time they had talked about it, they said they were going to export. They’re going to start allowing it in August.
Whether they’re going to keep to that timeline or not, we don’t know. It’s China. You never know until it’s too late.
Shayle Kann: So just to clarify, historically, China was the number one phosphate exporter, the number two urea exporter, and then they basically stopped exports. And as of now, they’ve stated they’re going to start exports again this summer, but TBD, if that actually happened. So that’s ‘thing one’ that was already contributing to global supply tightness. Then there’s Europe and the Ukraine-Russia situation. What impact did that have?
Josh Linville: This goes all the way back to 2021. And during that time, that is when you saw Europe basically sit there and tell Russia, “We’re not interested in any flows from your Nordstrom two pipeline that you just spent all this money building.” And they got into a tiff and eventually Russia shut off the flows and then somebody, I still don’t think we actually know who did it, plenty of theories, but we don’t know actually blew up the pipelines under the water. Well, from Russia’s standpoint, why would I go repair them? Europe doesn’t want the gas. I’m not going to go spend the time and the money and the effort to repair those pipelines. European gas value skyrocketed. That Dutch TTF went from whatever the normal was, three, four, five dollars an MMBtu to, I think it was August 2021, $103 an MMBtu. Now since then we’ve normalized the market and they’re finally back to like ten, fifteen is kind of their normal range, but that means their production, their nitrogen production in Europe is only sitting about 75% of normal.
And that’s for all of Europe. And when you start to break that down, that’s about three and a half million tons of urea that’s not being produced a year. That’s a couple million tons of UAN not being produced a year and that hurts. Their farmers aren’t going to just sit there and say, “Well, darn, I guess if we’re not producing it, I just won’t use it. ” That means all of a sudden those tons that aren’t being produced now get shoved on the world market as an unnatural buyer and start competing with everybody else trying to buy those tons and replace them. So it’s less supply and it’s more demand. That’s helped boost prices and that’s something that’s been ongoing for a while. And unfortunately at this point in time, we’re sitting in 2026. I don’t know that we will ever see 100% in Europe again.
I think we’ve got to really look at them and say, how many of these plants that have been offline now for years? How many of these will actually come back online in the future?
Shayle Kann: Is it in that case because they have insufficient supply of gas to feed those projects or is it that gas prices are too high and so they’d be losing money on producing more?
Josh Linville: It’s gas price is too high. When you look at the economics of it, it just doesn’t make sense with where global nitrogen values are. I also think there’s the political aspect of it. The European political engine has been really charging towards green energy and frankly this old school, old technology, nitrogen production from their viewpoint is very dirty. It’s outdated. We don’t want to have anything to do with it. So you’ve already got bad economics for the plant and then you’ve got a political outlook that basically sits there and says, “Don’t put any money in these plants because you’re probably not long for this world. We’re not going to support it. We’re doing everything we can to shut you down.”
Shayle Kann: Okay. So we have China stopping exports. Then we also have Europe producing less as a result of high gas prices as a result of the Russia-Ukraine war. Then the US invades Iran. Talk to me about the role the Strait of Hormuz plays in the global fertilizer trade.
Josh Linville: From a nitrogen standpoint, there is not a more important body of water in the entire world. About a third of the world’s tradable urea gets exported through that waterway. And so we always look at the top ten exporters in the world. That’s who you really want to watch. Three of the world’s biggest urea and anhydrous exporters sit behind the strait. They’re in the Persian Gulf. It’s Iran, it’s Qatar and Saudi Arabia. And with that body of water still closed to normal traffic, that means all those tons are locked away and just missing. And because this has gone on for so long, those plants have had to have slowed down dramatically or completely shut down because there’s nowhere to go with that finished good.
There’s only so many places to stockpile this stuff. I mean, after a certain point, your covered storage runs out, you’ve got it filled. And some people have said, “Well, maybe they’re shipping it out into the desert and storing it out there. And listen, anything’s possible, but I wouldn’t think that’s a step that they would want to take.” So you’ve got to believe a lot of this product is just not being produced today because there’s nowhere to go with it until the street reopens and vessels start to show up again.
Shayle Kann: Okay. I mean, I don’t know, give me a sense of the magnitude of the shock that has created. How much of global supply then has vanished while the Strait of Hormuz is closed?
Josh Linville: With that body of water closed just in itself, I think we’re talking about a third of the world’s tradable urea gone. And a good chunk of the global anhydrous, I mean, the same thing. These same plants that produce urea also produce a tremendous amount of anhydrous, but that’s not even the worst part of it. Then all of a sudden you got to think about, well, what else comes out of that body of water? You’ve got LNG shipments that are stuck behind there and that feeds major manufacturers like India. I mean, to give you a scale of it, Europe, we’re talking about their 75% production rate, that’s three and a half million tons missing India is very reliant on those LNG exports from the Persian Gulf. That’s how they feed their nitrogen plants. And just to give you a scope of size, they produce over 30 million tons of urea every single year.
And at one point at their worst spot, their production rates were down to 50 or 60% of normal because of high prices because of the lack of the input. So that’s on an annualized basis, that’s fifteen million tons per year that was missing. That’s the equivalent of all of Europe. So that’s where this thing is just completely blown out. It’s no longer just the individual products. Now we’re talking about the inputs and for phosphate, it’s the lack of sulfur and the lack of anhydrous and the high price of those. It’s just this thing has just continued to branch out bigger and bigger and bigger every day and every week as this continues.
Shayle Kann: I guess stepping back for one second, you’ve talked about there are different products in fertilizer world. You’ve talked about urea and anhydrous ammonia and phosphate fertilizer and they all have somewhat different supply chains, obviously, and the geopolitics are different for each one. How much switching can be done? If the phosphate supply chain totally dries up, can the growers who are currently using phosphate switch to something else? Is that something that happens or are you pretty locked into whatever your fertilizer is?
Josh Linville: You can switch around in the silos. And the typical, the major products are nitrogen, phosphate potash. Now there’s a lot of other micros out there. There’s sulfur and everything else out there, but those are the three majors. And take nitrogen, for example. The three major products within that silo are urea, UAN, and anhydrous ammonia. You can switch between those products presuming that you have the equipment and the storage and the technology to put on the fields and things like that because a unit of nitrogen is interchangeable between all those. Now there’s some that are going to say, “Listen, I’d rather do liquid. I’d rather do dry. I’d rather do gas,” but it’s all nitrogen. You cannot sit there and say, “There’s not enough phosphate to go around, so I’m just going to make it up with nitrogen.” They do completely separate roles from each other.
So what happens in the phosphate market, unfortunately, you can’t get help from potash, you can’t get help from nitrogen. It is what it is.
Shayle Kann: So we’re ten weeks in now to the US post invasion of Iran. I mean, the Strait of Hormuz has been closed for most of that time now. Are we feeling the full effects of that at this point or is it like a delayed reaction because people have worked through whatever stockpiles they had and so on? Where are we in the cycle?
Josh Linville: I think we’re in a situation where we’ve gotten past the bulk of the global demand. What I mean by that, everything for the world from a spring perspective, the Northern Hemisphere is kind of wrapping up. What you have in place is what it is. That’s what you’re going to have. Now we’re moving to this summer period, which is typically very, very slow, very, very quiet from a demand standpoint and when you see your typical low prices for the year. The issue is going to be that period’s going to be even quieter because the sellers are going to sit there and say, “Listen, my price needs to be incredibly high for all these reasons that are absolutely right.” And the buyer’s going to sit there and say, “Well, look at the grain price, look at all this other stuff. This makes no sense for me to buy it.
I’m not going to do anything.” So I think we turn into a stalemate and then as we start to move into, let’s say the fall, the winter, the Q3, Q4 period of the year, now all of a sudden we’re going to start to see more of the carryover effects from what’s going on today. And that assumes this entire situation fixes itself. The Strait reopens. If it doesn’t and it continues, bad goes to worst every single day that it continues. If this thing stays closed for a little while, we do have to start having conversations of who gets it, who’s willing to pay the most, who’s able to pay the most to get their hands on this product because there’s not enough to go around.
Shayle Kann: Before we talk about the ‘it doesn’t open’ scenario, just playing through the ‘it does open’ scenario sometime relatively soon and shipments start up again, you’re saying that even then that fall period into the winter when demand normally picks up again and prices rise, that’s going to be super tight already. People will have been basically frozen through the summer, but they’ll need to order again. The demand side will need to pick up. In the fall, suppliers will still be tight, prices will be high, but it may not be a situation where we’re effectively rationing fertilizer on a global basis. Is that right?
Josh Linville: Yeah, I think so. And listen, this is all theoretical, right? We’ve never seen anything like this in the marketplaces. I mean, it’s stuff you talk about, classes you can theorize and speculate and that’s all we’re doing is trying to make as good an educated guess as we possibly can. We don’t quite know, but I always look at it from a very fundamental standpoint. The price, the S&D, the buyer and seller, it’s all about who has more pressure. When the seller has more pressure, the price falls. When the buyer has more pressure, the price rises. And after we move out of this summer quiet period, we start to move into a situation where that buyer’s like, “I’ve got to start getting stuff. I got to start getting some of these supplies. I’ve got farmers walking in the door. They’re wanting to apply some stuff, they’re wanting to buy ahead. Now all of a sudden that pressure moves back to them and the supplier side, the sell side can sit there and say, listen, all of these tons that weren’t produced, that weren’t exported, et cetera, is still carrying over.
And ultimately speaking, we could see some dips here and there, but I think the entire structure of this marketplace stays higher priced than average probably through at least spring of ‘27.
Shayle Kann: I guess it’s not binary the Strait offer moves opening or not opening. You could see a trickle of ships, you could see something in between selective shipments. Who knows what’s going to happen. I’m not here to predict geopolitics, but is it kind of a linear thing? The more supply you can get out from behind the Strait, the more rational and reasonable the market is going to be, the lower prices are going to be. Is it just direct correlation like that?
Josh Linville: Yeah. And in fact, one of the things we did, we used a vessel tracking company and we went through and we tried to figure out how many tons of Urea are sitting on vessels right now. They got caught behind the Strait when it shut down. Our estimates are somewhere between 900 to a million tons are sitting on vessels right now, literally just sitting in the Persian Gulf waiting, waiting for somebody to give them the go ahead they can sail through safely without any sort of a fear of attack. Let’s say that thing opens right now. As we’re talking, all of a sudden all the new stations come out and say, the Strait is open. The president says, “Strait’s open.” Iran says, “Yeah, it’s all clear. Go ahead.” That’s 900,000 to a million tons that needs to find somewhere to go during a historically low demand period.
That’s going to create a situation where prices fall, but it doesn’t fix all the supplies that were lost throughout this entire ten plus week period.
Shayle Kann: Because that million tons was meant to be delivered in the spring period, you’re saying.
Josh Linville: Yes.
Shayle Kann: That’s the interesting dynamic about the fertilizer market because it’s so seasonal that you missed the window basically.
Josh Linville: Yep. And that’s what we’re looking for for a major bearish event. If that thing opens right now, everybody in the world’s going to throw their hands up and say, “I don’t want it. ” And the ship owner’s going to say, “Well, you bought it. I bought it for spring delivery. I don’t need this stuff. Take urea, for example. The next time we use urea is going to be spring of ‘27. I don’t want to buy that at these prices this far in advance.” And I think a lot of the countries around the world will do exactly that, just sit there and throw their hands in the air and say, “I’m reneging on my purchase because I don’t need it right now.”
Shayle Kann: That’s such an odd dynamic in the market where you’ve got this extreme supply tightness and at the same time, if that supply were to show up tomorrow, there would be no demand for it. How long can it sit on that ship?
Josh Linville: It’s going to depend on the conditions of the ship and loading and things like that and the quality of when it was produced. So I mean, if it’s good quality coming out of the facility, presume it’s a well, let’s say a tight ship, right? You don’t have a bunch of leaks, you don’t have humidity getting into the holds. It can last for a while. But the problem is the true nature of it is humidity is a big thing. I mean, you’re sailing across the ocean, you’re surrounded by water. That water or that humidity seeps its way into it and that degrades the quality of it. It starts to go down. It starts to kind of break it apart. So I don’t know. There’s too many variables there, but I would say you’re not talking years, you’re probably talking months.
Shayle Kann: Which means that potentially if they were forced to hold it until spring ‘27, it would sour before then.
Josh Linville: Yeah. I think it’d be something where if you have the market opening sooner than later, you probably have a market that starts to diverge because right now it’s just, listen, a urea ton is urea ton. You have a little bit of a difference if it’s open origin or if it’s coming from this place to that place. I think you get a new variable in the marketplace where it’s like these are tons that were sitting in the Persian Gulf prior to the Strait of Hormuz. And I think that trades at a different delta to the rest of what we would call the normal market, just because there is that fear of what the quality looks like.
Shayle Kann: Okay. So that’s the scenario where the Strait opens in the near term and then things are still pretty wonky for a while. I don’t want to fear monger, but in the scenario where the Strait stays closed for who knows some number of months additionally, what does that look like?
Josh Linville: We have to start having a very hard conversation about shortages around the world. I’m trying to think of a nicer way to say it. I don’t think I have a way of doing it. If we get to the 4th of July and the Strait still is closed, if we start up with my youngest is a freshman in high school, be a sophomore in the fall. If he goes back to school in the fall and the Strait is still closed, we have lost so much supply out there. It’s now a situation of who is willing to buy it. It becomes eBay. If I’m a manufacturer that’s not situated in the Persian Gulf and I’ve got tons, I’m going to sit there and say, “I have got a vessel ready to load it. I’ve got the tons at the port. Who’s paying me the most? Submit your bids and I’ll let you know who wins.”
Shayle Kann: I presume, when Russia invaded Ukraine and gas became tight in Europe, then of course there’s been a big conversation in Europe about self-sufficiency from an energy perspective and that has resulted in lots of policy. We see versions of that all over the place. We’re seeing that, I don’t know, with rare earths now in the United States, when China shuts off the supply of refined rare earths, now we’re trying to spin up our own domestic refining capacity and so on. I presume that people are talking about that in fertilizer world right now. The import reliant countries must be thinking this is a pretty precarious and dangerous situation. Maybe we don’t want to put ourselves in this position in the future. Two questions. One, is that happening? Do you see that happening? And two, how long does it take to stand up new domestic supply?
Josh Linville: I think it’s happening to an extent. The problem is it’s not happening on the products that we actually need. Like I’d said earlier, anhydrous is one that we produce almost all that we already need. So we’re not that reliant on imports and that’s where a lot of the new nitrogen production is coming from. It’s new and hydrous facilities and a lot of it’s backed by this green energy, whether it’s green or blue, it’s clean energy technology. And the issue with that, and I’m not sitting there saying I’m opposed to it. I am all for new production that cleans up the environment. My best friend was a Boy Scout. Most of my boys were Eagle Scouts and leave the world in a better place than what you got it. I’m all for it. But the problem is we’re talking about food supplies. The product that actually grows that food and my fear is these products, the technology may be not there quite like we think it is.
Josh Linville: We’re getting ahead of ourselves and we’re leaning too far into it and all of a sudden in the future we’re going to figure out, oh no, we went too far down this path. It doesn’t quite work. We need to get back to where it was, which brings you to the second question. Building a new facility takes years, literally years. From the second you say, “Okay, I want to build this. I have the funding. I want to build it to go through the engineering, the construction process and everything like that. It’s something that takes multiple years for that to actually spit out the first ton. And that’s the biggest issue that we have seen. With all this going on, if we’re going to go through all this pane of high prices and tight supplies, you would think that, okay, to your point, we’re going to increase our own production.
We’re going to reduce our reliance. Yes, it’s worked for a long time, but it’s a different world today. There’s too much at stake. Well, number one, you’ve got to come up with three, four, five billion US dollars for a world scale nitrogen production facility. They are not cheap and there’s no way to guarantee the margin like your investors are going to require. And then even if you do get all those funds, the very first ton that you produce is going to be years in the future. And so it’s just from a financial standpoint, it’s a very, very hard investment for most parties who are not already in the space to enter into.
Shayle Kann: You mentioned the wrong kind of production is scaling. Setting aside the green part of it, I mean, it’s anhydrous, you’re saying, is most of where the new capacity … I presume you’re talking about in North America or do you mean globally?
Josh Linville: Yes, in North America. When you look around the world, there are some new urea production facilities that are being built. In fact, India has partnered with Russia to do a partnership facility based in Russia with the tons all flow into India. They’re trying to reduce their reliance on the rest of the world. They’re doing exactly what you’re talking about. They’ve sat there and said, listen, I know this global urea marketplace takes advantage of me every time I do one of these purchase tenders and I’m sick of it. We know the demand’s going to be there. We know we’re going to need to import them. So rather than be relying on the market taking advantage of us, we’ll just work with Russia, produce them there, all the tons to come to us. We’re good. That’s something I think a lot of countries around the world need to be looking at the same thing.
Shayle Kann: Okay. And then so back to North America, so we’re sort of self-sufficient currently on urea and anhydrous. Wait, sorry. Where are we self-sufficient and where do we import?
Josh Linville: We import a little bit of anhydrous ammonia and UAN, but we produce most of what we need. We’re self-sufficient on phosphate and with Canada, we’re self-sufficient on potash. Urea is the one that we have the most imports on.
Shayle Kann: Okay. I don’t know. So back to a North America centric view of things then, setting aside the global picture, does that dire scenario where the Strait of Hormuz remains closed for some number of additional months, are we going to see big impacts in North America or is it that we’re actually pretty insulated and most of the rest of the world is going to feel the, besides, I guess China as well are just going to feel the pain?
Josh Linville: Let’s assume that the government is not going to come in and start restricting markets. And what I mean by that is mostly from an export standpoint. If there’s no restriction to exports, if the rest of the world’s dealing with a situation like phosphate supplies are incredibly hard to find, same thing with urea. People cannot find it and the price just starts to take higher and higher and higher. Well, if our price doesn’t do anything, well, that export opportunity pops up and arbitrage opportunity pops up and we start losing supply that we can’t lose. And so that’s why you see our market go with the rest of the world and people do get a little upset when they’re sitting there saying, “We produce most of this. Why is it the Henry Hub is dirt cheap, but my nitrogen price is sky high like the rest of the world? That shouldn’t be the case.
Shayle Kann: Because we can export. Yeah. It’s kind of the same thing that is starting to happen in the natural gas market because of LNG exports. Yeah. Okay. But what you’re saying the US would need to do to avoid the ramifications of that is essentially replicate what China has done, which is ban or restrict exports.
Josh Linville: Yep. And that will work for a lot of the products, but all of a sudden if you start to put that sort of a program on urea, well, if you can’t export, how many people are going to be willing to import product to here? And we’re so relying on those imports. And it’s one of those things. I’m a big fan of free markets. It’s cold, it’s calculated, and it could not care less about your feelings. But at the end of the day, it gets a supply where it should be. The more governments start to play a role in these free markets, the worse it gets. We’ve seen it with India with the way that they shield their farmers from global prices. We see it with Egypt putting a $90 a ton export duty on their nitrogen products. We’re starting to see more governments step in well-intentioned. I understand why they’re doing it, but unfortunately, good intentions don’t always equal good results.
Shayle Kann: What crops are most reliant on urea? Assume this happens, assume we impose an export ban or restrict exports and as a result, we can’t import as much urea and so urea prices in the US go sky high. What would be the downstream effect of that?
Josh Linville: Basically, the one product that doesn’t need nitrogen for the most part is soybeans. When you look at corn, corn is the one in the US marketplace that we look at the most because it’s the biggest demand point. It’s the one that requires the most fertilized, the most nitrogen to grow that crop. But it also makes a big difference for wheat, for cotton, for rice, for all these other crops out there. And that’s the thing at the end of the day as we focus on corn here in the US. That’s just corn is king, that’s what drives our marketplaces. It’s when we start to look at the rest of the world and we start talking about some of these places where we’re like, “Hey, they could start having problems.” Australia, if they start getting rain and they’re short of urea, wheat’s a big market down there, right?
They produce a lot of wheat. Eastern Europe is wheat. Look at all the stuff that Asia produces. So now we’re talking about actual food stocks that are getting impacted because of the lack of the fertilizers out there.
Shayle Kann: Well, I think we’ve done a good tour of the state of the fertilizer market. It is a little scary. I mean, it feels a little safer to be sitting in North America as you and I both are at the moment. But I think for all the conversation that I see at least around the oil market and the impacts that Strait of Hormuz closing has had on that, I see a lot less on fertilizer. It seems like it is equally, if not more impactful. So appreciate you walking me through it.
Josh Linville: Yeah, for sure. And that’s the thing. Everybody focuses on oil and gas and things like that coming from the Persian Gulf. You can’t eat or drink those products. End of the day, and this is why I think fertilizers become such an important topic. It grows the food that we need to eat. It impacts the grocery store. So it’s a massive, massive thing. It’s nothing we’ve ever seen before.
Shayle Kann: Scary, but super informative. Thanks, Josh.
Josh Linville: Anytime.
Shayle Kann: Josh Linville is the vice president of fertilizer at Stonex. This show is a production of Latitude Media. You can head over to latitudemedia.com for links to today’s topics. This episode is produced by Max Savage Levenson, mixing a theme song by Sean Marquand. Anne Bailey edits the video version of the show. Stephen Lacey is our executive editor. I’m Shayle Kann and this is Catalyst.
