This week, I talk about fertiliser trading with Michael Sebag, founder and director of Orcom. But first, I wanted to know if fertiliser was a commodity.
“Urea and DAP are commodities,” he told me. “Fertiliser futures trade on the Chicago Mercantile Exchange, with domestic US quotations for various types of fertilisers, including Urea, Diammonium Phosphate (DAP) and Urea Ammonium Nitrate (UAN). But it is not a world market. It is like cotton because you can’t hedge cotton from Burkina Faso on the US futures.”
“What’s the main difference between fertiliser and other commodities?” I asked.
“CME’s fertiliser futures contracts are not traded as actively as other commodities. The trading volume tends to be lower, which can result in less liquidity. Fertiliser is a niche product, with fewer players directly involved compared to more widely traded commodities. Most trading activity comes from industry participants, such as fertiliser producers, distributors, and large agricultural enterprises.
“There have been attempts to launch a world futures market in Chicago. The obstacle is that you cannot get the product delivered. The leading producers sell their production themselves and would not accept to have it delivered against a futures market.
“The lack of a futures quotation makes selling and buying forward or hedge challenging. All the big grain-trading companies traded fertilisers at some stage, but they all gave up partly because of that. Besides, the market is small. The biggest fertiliser trader, Ameropa, possibly trades over 10 million mt annually. Most fertiliser is used where it’s produced and marketed directly by the producers. They don’t need traders.
“Some grain-trading companies still do fertiliser in Latin America for barter trade, giving farmers fertiliser in exchange for crops nine months later. But now the farmers are wealthier and have less need for barter.”
“As there is no hedging mechanism, is the business mainly back-to-back?” I asked.
“I mainly operate back-to-back,” he replied. “I work alone and am not equipped to take too much risk.
“The larger companies take positions, particularly in nitrogen fertiliser. Four or five million tonnes of ammonium sulphate are shipped from China to Brazil annually. Traders go long and pray that the price doesn’t collapse during the 40 days of voyage time. The vessels usually carry 60 – 70,000 mt. If they’re lucky, they sell 20,000 mt in advance and sell the rest on the way.
“Are there payment issues?” I asked
“When I started in the business in 1997, there were 100 importers in Brazil alone. Today, four companies make up 90 per cent of the import market. You have no payment issues.”
“Would a vessel take fertiliser from China to Brazil and then soybeans back?” I asked.
“Yes, they are the same vessels that move soybeans or raw sugar from Brazil. However, a cargo of 70,000 mt is specific to the ammonium sulphate trade in China and Brazil. Most fertiliser is shipped in vessels of between 25 to 50,000 mt. In Europe, 3,000 – 4,000 mt coastal vessels move fertiliser from Russia to North Europe.”
For such a small, niche market, fertilisers are critical in global agriculture. As Michael Pollan explains in his book The Omnivore’s Dilemma – A Natural History of Four Meals, the great turning point in the modern history of agriculture can be dated to 1947 when a vast munitions plant at Muscle Shoals, Alabama, switched from making explosives to making chemical fertiliser. Ammonium nitrate is an excellent source of nitrogen for plants. The chemical fertiliser industry (along with pesticides based on poison gases) was the product of the US government’s effort to convert its war machine to peacetime purposes.
Even though the Earth’s atmosphere is about 80 per cent nitrogen, nitrogen atoms must be split and fixed to hydrogen atoms before making fertiliser or bombs. A German chemist, Fritz Haber, worked out how to do that in 1909. Before he made that discovery, all the usable nitrogen on Earth had to be fixed by soil bacteria or electrical lightning, which breaks down nitrogen bonds in the atmosphere.
In his book, Enriching the Earth: Fritz Haber, Carl Bosch and the Transformation of World Food Production, Vaclav Smil explains that “there is no way to grow crops and human bodies without nitrogen.”
Without Haber’s invention, life on Earth would have been limited by the small amount of nitrogen that bacteria and lightning alone could release. Mr Smil argues that the Haber-Bosch process for fixing nitrogen (Bosch industrialised Haber’s idea) was the most important invention of the 20th century. He estimates that 40 per cent of the population today would not be alive if Haber hadn’t invented it. Without synthetic fertiliser, billions of people would never have been born.
Once humankind had acquired the power to fix nitrogen, the basis of soil fertility shifted from a reliance on the sun’s energy to a new dependency on fossil fuel. More than half of the world’s supply of usable nitrogen is now manufactured—and farmers use more than half of all the synthetic nitrogen to grow corn. *
“We cannot live without fertiliser today,” Michael told me. “In 2021, the Sri Lankan government banned fertiliser imports to save foreign exchange and demonstrate that the country was green and sustainable. Rice production collapsed by 20-30 per cent, leading to hunger and food riots.
“We do not have an alternative to fertilisers,” he continued. “My friends complain about what I do. They say that fertilisers pollute, and we should be organic. You cannot feed nine billion people with organic. Maybe one day, but not today.”
“But there are some organic fertilisers,” I argued.
“Farmers still use human waste in some parts of the world,” Michael replied. “North Korea is one. In the 19th century, guano, bird excrement, was probably the first fertiliser traded internationally. It is rich in nitrogen, phosphate, and potassium. Farmers still use duck and chicken excrement in the Netherlands and Belgium, but it doesn’t work for all crops.
“Typically, you use NPK triple 15 on coffee, which is 15 per cent nitrogen, 15 per cent phosphate, and 15 per cent potash. The rest is filler. The ratio of duck or chicken waste is not enough. Coffee farmers must use chemical fertilisers.
“Nitrogen, phosphate and potassium are the main fertilisers, but what is DAP?” I asked Michael.
“DAP, diammonium phosphate, is one of the most used phosphate fertilisers. You mine the phosphate and mix it with ammonia to make DAP or MAP, monoammonium phosphate.
“Urea, ammonium nitrate, and ammonium sulphate are nitrogen-based fertilisers. Urea, made from gas, is the main one. You take the gas, process it into liquid ammonia and use that to produce urea. In China, they make it from coal, which is of lower quality. It comes from gas in the Middle East, Egypt, and Russia.
“Potash is a granulated mined product. Among fertilisers, it is the least transformed nutrient.”
“What are the main trade flows in fertiliser?” I asked. “I saw that Trinidad and Tobago is a big exporter of urea. I find that odd.”
“Not really,” Michael replied. “The country is small and has a lot of natural gas, which the industrial sector transforms into ammonia and ships mainly to the US. The nitrogen industries are based where the gas is. You must have a cheap raw material. It makes no sense to produce urea in Europe today. It will cost $500 per mt when the market is $360.
“The big producers have a lot of gas: Russia, the Arab Gulf, Iran, Persian Gulf, Qatar, Egypt, and Indonesia. Venezuela used to be a producer, but you know their situation today.
“Demand for this product is mainly in the US, but the country is nearly self-sufficient with only occasional imports from Canada. Brazil and India are the two biggest importers.
“India is trying to increase its production because it costs them billions in their agriculture budget annually to subsidise these fertilisers. The DAP price CFR India is around $620 per mt, but it trades locally at around $500 per mt. The government pays the difference.
This year, India will import 3 to 4 million mt of urea compared to 12 million mt three to four years ago. But if they don’t import urea, they import the liquid gas to make urea.”
“What about the phosphates? I asked. “I see that Morocco is an exporter.”
“Morocco has the most extensive reserves of rock phosphate in the world. The country has 70 per cent of global reserves, enough to last 2,000 years at current yearly consumption rates.
“There are significant phosphate reserves from Morocco and Algeria to Tunisia and Egypt. Morocco used to export much more rock phosphate as a raw material but is investing in transforming it locally. They want to bring factories and jobs to their country. That brings added value.
“Russia is another significant phosphate producer. Russia is prominent in everything that has to do with fertilisers. They have sulphur, ammonia, cheap gas, rock phosphate reserves and potash.
“The US is also quite significant. When I started 25 years ago, there were ten plants in the US. Today, you have maybe three or four. They all belong to Mosaic, which used to be part of Cargill.
“Sulphur comes from the oil and gas refining industry. That’s why it comes mainly from the Middle East and areas with gas and oil. When you mix rock phosphates with sulfuric acid, you get liquid phosphoric acid, which you mix with ammonia to get finished phosphate fertiliser, DAP and MAP.
“And the potassium – where does that come from?
“It’s also a mined product. There are a few big players: Russia again, Belarus, and Canada. Israel and Jordan are also producers from the Dead Sea area.
“How volatile are prices?” I asked.
“The nitrogen price is the most volatile. Like most commodities, it depends on the S&D, but it also depends on the gas price. In Egypt, you could see the cost of urea go from $300 per mt to $350 per mt in one week. Phosphate prices are more stable. There are fewer producers.
“Potash prices are the most stable. The business is 100 per cent in the hands of the producers, with prices fixed every six months. Canadian exporters will go to China and negotiate with the two or three leading state-owned Chinese importers for the next six months. It doesn’t mean prices don’t go up and down, but it’s super stable.
“Energy prices are an essential price driver, but demand is also significant. Farmers have less money to spend on fertilisers when crop prices are low. Demand fluctuates significantly, which is not the case in most agricultural commodities. Fertiliser demand depends on its price relative to the price farmers receive for their crops.
“Farmers must apply nitrogen each year, but with phosphate and potash, what they use in year one, they can still find some in year two in the soil. It’s not that they can skip it, but they can apply less.
“Fertiliser is one of the inputs that affect the agricultural supply cycle. When crop prices fall, farmers plant less area and use fewer inputs, both area and yield fall. They play a role in balancing agricultural commodity S&Ds.”
- For more on the history of fertilisers, I recommended The Alchemy of Air by Thomas Hager.
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