The war in Ukraine is exacerbating a global shortage of fertilizer, resulting in increased food prices and scarcity.

• The conflict in Ukraine has resulted in a global shortage of crucial grains and fertilizers, potentially leading to food scarcity.
• Fertilizer prices are soaring, prompting farmers to consider rotating crops or reducing nutrient use, potentially impacting crop yields.
• A commodities strategist stated that the situation is a "double whammy, if not a triple whammy," due to the combination of geopolitical risk, higher input costs, and shortages.

The Ukraine war has intensified worries about the availability and affordability of certain essential foods due to a shortage of fertilizers.

According to Morgan Stanley, Russia and Belarus together accounted for roughly 40% of the world's potash exports. However, Russia's exports were affected by sanctions, and in February, a significant Belarus producer declared force majeure, stating that it would be unable to fulfill its contracts due to circumstances beyond its control.

According to Morgan Stanley, Russia and Ukraine together export 28% of fertilizers made from nitrogen and phosphorous, as well as potassium. Additionally, Russia exported 11% of the world's urea, and 48% of the ammonium nitrate.

The escalation of sanctions and war has caused a surge in fertilizer prices, which has further increased the cost of high grain prices.

In a recent CNBC appearance, CEO Tony Will stated that global fertilizer supplies are extremely limited. As a company that manufactures and distributes fertilizers, CF is aware of this issue.

"The combination of factors includes an unprecedented demand and a significant decrease in supply availability, which has been further intensified by the war in Ukraine and issues with exports from Russia and Ukraine," Will stated.

A contributor to higher costs and shortages

"Geopolitical risk, higher input costs, and shortages are a triple whammy for us," said Bart Melek, global head of commodity strategy at TD Securities.

Agriculture is likely to be negatively impacted, particularly in emerging markets where farmers may have to economize and pay more per acre, resulting in lower yields. However, in Canada, Saskatchewan, which is the world's largest potash producer, may benefit.

Higher grain shortages will increase the cost of basic foods and other commodities, resulting in higher input costs for producing everything from grains, wheat, and corn. This is due to the scarcity of grains, which bids up the price. Additionally, prices for cows, steers, and pork bellies have also increased significantly.

Potash and urea prices have significantly increased in some regions. For example, Melek stated that potash traded in Vancouver was priced at approximately $210 per metric ton at the start of 2021, but it is now valued at $565. Similarly, urea for delivery to the Middle East was trading at $268 per metric ton on the Chicago Board of Trade in early 2021, but it was valued at $887.50 on Tuesday.

Will stated that CF Industries is operating its plants continuously, prioritizing expedited shipments to affected areas, despite the need for maintenance. He emphasized that there are no new tons to produce, but rather a focus on getting existing inventory into the marketplace as quickly as possible.

The price of agricultural commodities has increased due to concerns about shortages, just like the cost of fertilizers has gone up.

Will stated that the issue of catastrophic proportions is the lack of availability and affordability of nutrients and inputs, and Russia and Ukraine, which historically export 30% of global wheat trade and 20% of global corn trade, are facing this problem. Additionally, the Black Sea being closed has resulted in the inability to get these commodities to market.

Rising prices for wheat, corn and soy

The Chicago Board of Trade saw a slight decline in soybean futures on Wednesday, while the S&P 500 rose about 4% on Tuesday due to concerns about Ukraine and worse-than-expected U.S. crop conditions. Despite this, soybean futures are still up nearly 30% year-to-date.

Morgan Stanley anticipates that grain prices will remain higher than the previous year until 2023.

In a report, Morgan Stanley analysts stated that the dry weather in Latin America prior to the Ukraine war led to grain inventory levels that would have kept prices high.

The conflict in Ukraine has led to uncertainties regarding the supply of corn and wheat, which in turn affects the use of fertilizers and global yields. As a result, our base crop price scenario predicts a 2-3% reduction in yields in higher-cost regions, with the possibility of larger disruptions if fertilizer availability and weather conditions are not favorable.

Morgan Stanley analysts predict that soy and corn prices will increase in 2022 and 2023, but after that, inventories will normalize with more supply from Latin America. They also anticipate that prices will become closer to production costs and drop 15% to 20% below longer-term contracts.

In 2021, Melek said that rose 57% and could be volatile this year, with an average increase of 25% higher on the year. Last year, prices rose 19% and could gain another 15% in 2022. Additionally, Melek said that was up 27% in 2021 and could add another 22% this year.

Melek said the high prices are being driven by tight supplies and shortages.

Melek stated that the current erosion of food security is on a massive scale and will affect people in the lower income distribution in North America. He believes that farmers will respond by rotating in less fertilizer-intensive crops and using less nutrients overall.

“Consumers are going to make choices too,” he said.

U.S. fertilizer production is dependent on natural gas, which has affected the industry. According to Morgan Stanley, the largest consumers of the top three types of fertilizers are Brazil, India, the U.S., and China.

Being a North American producer is significant for us as we pay approximately $5 to $6 per million British thermal unit (MMBtu) of natural gas, while Europe pays around $35 to $38 per MMBtu. This substantial difference in costs contributes to the high price of fertilizer, which is not only due to a lack of availability but also the high-cost producers.

This year, crops may not receive as much nourishment due to the high cost or unavailability of fertilizer, which could result in lower yields for some farmers.

CF's Will announced that they will begin exporting on a humanitarian basis to provide nutrients to a region in Latin America, which is a rich growing area but currently starved for nutrients.