Fertilizer prices have soared some 50% since the Russian invasion of Ukraine. And so have food prices (Charts 1 and 2). That is no coincidence: Russia is (or was) the global leader in fertilizer exports, with about a 15% share. And both Russia and Ukraine are major exporters of food commodities. Together, they account for 28% of global wheat exports, and Ukraine supplies 14% of global corn exports.

We expect to see upward pressure on both fertilizer and food prices while the conflict in Ukraine continues and Russian sanctions persist. Granted, both these conditions are very uncertain. But the longer they stay in place, the more people and investors will hear about the global impact of rising fertilizer prices.

Given that prospect, we explain how fertilizer is made, what is driving fertilizer prices, and how fertilizer fits into the global food industry.

Fertilizer provides key nutrients to plants and agricultural commodities that may be lacking in the soil. There are two basic types.

Organic fertilizer comes from organic material, including compost, bone meal, manure, and animal waste from food processing plants. It accounts for roughly a third of total fertilizer shipments. Organic fertilizers nourish the soil and provide natural plant nutrients, but in relatively small doses.

Inorganic fertilizer is made from minerals or various inorganic compounds. It provides three key plant nutrients – nitrogen, phosphorus and potassium. These are often only available in the soil in trace amounts. Inorganic fertilizers provide concentrated applications of required minerals. We focus on inorganic fertilizers in this explainer.

All living organisms require nitrogen. Among other things, nitrogen helps make amino acids, proteins, nucleic acids, and DNA and RNA. In plants, it is essential for leaf development and making enzymes and chlorophyll that enable photosynthesis. Even though nitrogen is plentiful, making up 78% of the atmosphere, most plants cannot use it in this form. It must be ‘fixed’ into a compound with hydrogen. We discuss this process below.

Without sufficient nitrogen, plant growth is slow, water use is inefficient, and agricultural yields are low.

Plants need phosphorus to support stem growth, root systems, flowers and seeds, and for disease resistance.

Potassium is essential for photosynthesis. It regulates the stomata (or openings) in leaves that allow water, oxygen, and carbon dioxide to pass in and out of the plant. Potassium deficiency may cause necrosis (weak or dead spots), brown-spotting, and higher risk of attracting pathogens.

Common abbreviations for nitrogen, phosphorus and potassium are N, P, and K, respectively. They account for roughly 50%, 30% and 20% of inorganic fertilizers applied to agricultural crops. Wheat and corn each consume about 18% of total nitrogen-based fertilizers globally, with an additional 15% going to rice.

These three types of fertilizers are manufactured in quite different ways, as summarized in the infographic below. We explain the basics.

As noted, nitrogen is plentiful in the atmosphere, but it is not in a form that plants can use. Nitrogen must be ‘fixed’ (or turned into a compound) by combining it with hydrogen and converting it into ammonia via the Haber process. The source of hydrogen is generally natural gas. Ammonia is then either converted into nitrate acid by combining it with atmospheric oxygen. Or it is converted into urea by combining it with carbon dioxide. These products can then be turned into various nitrogen-based fertilizers to meet different needs.

Natural gas accounts for about 85% of the cost of producing ammonia, which in turn drives nitrogen-based fertilizer prices. About 25% of natural gas production goes into fertilizer products.

Phosphorus fertilizers come from phosphate rock and ore. This is refined into phosphate concentrate, then combined with sulfuric acid to make phosphoric acid. This is then mixed with ammonia to produce phosphate fertilizers.

The key ingredient of potassium fertilizers is potash. It is mined and refined, then combined with either chloride or sulphuric acid to make fertilizers.

The fertilizer market is global in scope. Total global production is valued about $185bn, of which about $55bn is exported by producing countries. The leading exporter is (or was) Russia, with a 12.6% share and 15% including raw materials (Table 1). About 45% of its exports go to five countries, but the remainder is spread among countries worldwide (Chart 3).

Russia is also the leading exporter of fertilizer raw materials such as ammonia, urea, phosphate, and potash (Chart 4). Russia’s neighbour Belarus is the second-largest exporter of potash, with a 20% share.

Even though Russia is the largest exporter of fertilizer products, the major importing countries have diversified sources of supply. The infographics below summarize where Brazil and the United States source fertilizer imports (Figures 1 and 2).

The key takeaway here is that in the near term, the loss of Russian fertilizer has and will push fertilizer prices higher. But in the intermediate term, probably over the year, other countries should be able to increase production and offset much of the loss of Russian supply.

The Russian invasion sent corn and particularly wheat prices soaring (Chart 5). As noted, Russia and Ukraine account for 28% of global wheat exports, and Ukraine supplies 14% of corn exports. So far, the war has not affected soybeans and rice much.

However, soybeans and rice rose nearly 50% in 2021. The price rise was due to a combination of high natural gas, fertilizer prices, and shipping costs. We expect the higher cost of fertilizer will feed into these commodities in coming months unless prices fall sharply and soon.

Fertilizer is a major cost for farmers. Corn, wheat and rice require all three types of fertilizer (nitrogen, phosphorate and potash). Historically, fertilizer has accounted for about 35% of the production costs of corn and wheat and about 15-20% for rice. Soybeans is lower at about 10% because they do not require nitrogen-based fertilizer. Soybeans are a legume (e.g., beans and peanuts), which can fix or convert atmospheric nitrogen into a usable form naturally.

All things equal, if the recent spike in fertilizer prices is sustained and the cost passed through to consumers, back-of-the-envelope calculations suggest that corn and wheat prices could rise 15-20%, rice by 10%, and soybeans by 5%.

All things are hardly equal, of course. Corn and wheat prices may be artificially inflated because of uncertainty about how the war and sanctions will affect supply in the coming year. Weather and climate change will play a part, both for better and worse. Farmers may change the mix of what they plant based on projected costs and estimated selling prices. And supply chains remain under stress.

Last but not least is general inflation. It is apparent from Chart 5 that the UN food price index has been considerably less volatile over time than underlying food commodities. That is largely because end-user food prices include various other less volatile costs, including transportation and processing, packaging, marketing and distribution. Unlike most of the past decade, most of these costs are now under rising pressure. And they will surely impact food prices, along with commodity prices and fertilizer .

Most people worldwide will notice food prices, not fertilizer prices. Indeed, food is as ubiquitous a human requirement as energy (note that Russian energy exports are NOT subject to sanctions yet). Most people in the developed world will be able to cope with higher food prices. But that is less than 20% of the global population. More than half of the world’s population depends on rice and lives in a developing country. They have limited means to cope with sharply higher food prices.

If food prices continue to rise, many countries could easily face restive if not outright rebellious populations. Governments may be unable to do much about many of the factors pushing food prices higher. But one easy target will be to provide relief for farmers by  lifting sanctions on Russia’s fertilizer industry even if most countries remain united in maintaining other sanctions.

Many other variables are at play, particularly the persistence of hostilities in Ukraine. Another wildcard is how soon other fertilizer-producing countries can ramp up production to replace Russian exports. Depending on how these and other issues shake out, fertilizer could become a wedge issue that leads to relief on other Russian sanctions. Put differently, fertilizer prices could have ripple effects well beyond food prices.

Finally, for all the benefits of inorganic fertilizers, they can also be harmful. If they are overused, they can weaken the natural elements of soil, ultimately making it less productive.

Manufacturing inorganic fertilizers is a carbon-intensive process. As the world moves to reduce carbon emissions in coming years, new methods of manufacturing fertilizers will have to be developed.

These twin needs – making fertilizers that better support the soil and are less carbon intensive – will likely keep upward pressure on fertilizers prices over time. But that is a story for another year and decade.

Food prices are going up because of the war in Ukraine. Russia is the leading exporter of fertilizer and related raw materials, which directly impact food prices. Also, Russia and Ukraine are major exporters of food commodities. Together, they account for 28% of global wheat exports, and Ukraine supplies 14% of global corn exports. The war and associated sanctions on Russia are disrupting food production and trade, driving up prices.

It is possible. US President Joe Biden recently argued that the world could suffer from a food shortage due to the Russian invasion of Ukraine. Meanwhile, the Group of Seven recently discussed production increases to combat such an eventuality.

Fertilizer is a natural or chemical substance that farmers add to the soil to boost its fertility. Fertilizer provides key nutrients to plants and agricultural commodities that may be lacking in the soil. There are two basic types: organic and inorganic. Inorganic fertilizers are nitrogen, phosphorus or potassium based.

Fertilizer accounts for about 35% of the production cost of corn and wheat, and 15-20% for rice. Depending on projected crop prices, farmers may change their planting plans to maximise profits, affecting the supply and price of various products. Without fertilizers crop yields would be lower, food shortages more endemic and food prices higher.

Who knows? Today, many countries are united in supporting sanctions on Russia. But they are also costly in many ways. When the Ukraine invasion moves off front-and-centre of news media coverage for whatever reason (e.g., end of hostilities, reader/viewer fatigue, other hot new issues), pressure will surely rise in many countries to revisit and modify sanctions. It is easy to make the case that fertilizer will be near the top of the list, although any decisions will depend on facts and circumstances at the time.

Enjoying this article? Take advantage of this one-time offer to unlock full access to Macro Hive…

This offer will not be shown again.

Very good article, congrat and hope the war end quickly …

Please sign-up for a Macro Hive account then log in to leave your comments.

Showcasing the best macro and financial market research and strategy.