TURF WAR: Gulf War 3, Nitrogen and Crops

PRICES

Crop commodity prices have gained since GW3 began. The gains have been mild compared to those in energy and energy-product prices, including fertiliser. The modest reaction reflects that GW3 has not caused any major disruption to near-term physical markets. Therefore, the flurry in prompt fertiliser prices has not been repeated in prompt crop prices. Instead, more modest moves saw new-crop prices gain while old-crop prices are mixed. Clearly, corn prices have gained the most since the war began.

Crop prices’ modest reaction does not imply markets are forecasting little GW3 impact.  A widespread shortage of fertiliser would cause hefty production falls and hefty price rises.  GW3 will already interrupt fertiliser supply to some degree.  And there are plausible scenarios where GW3 could cut fertiliser supply by even more.  Crop prices’ apparent quiescence is likely more a reflection of the high uncertainty about whether those scenarios will be realised.  Markets do anticipate outcomes, but that requires participants to form convictions and then trade.  The current lack of conviction is understandable given very high levels of uncertainty.  That, of course, can change quickly.

Importantly, crop commodity prices remain low from a long-term perspective. Therefore, prices have room to rise substantially without becoming exceptional.

SUPPLY CONTEXT

We assess that supply is broadly neutral across the major crop groups. Wheat has a little more latitude than coarse grain or oilseeds. That supply context would allow the market to absorb some production losses, without causing very high prices – but that has limits. Therefore, the existing supply is insufficient to prevent hefty price rises if there are major disruptions to fertiliser supply. 

CROP SEASONALITY

Crop production’s seasonality is important to understanding the impact of fertiliser supply interruptions. Timing—not just availability—is a key facet.

Crop production is mostly periodic (seasonal) rather than continuous. Crops are not always growing. And fertiliser is only applied intermittently when they are. That contrasts with energy, where production and consumption are continuous. Seasonality can give markets more time for workarounds. This flexibility, though, is finite. Crops have ‘hard’ time windows. Growers need to plant crops within a certain period. And growers also need to apply fertiliser at times determined by crop development. As with so many things, timing matters.

Crop production timing is split over four broad cycles. The four are generated by combinations of the northern and southern hemispheres’ winter and summer crops. The harvest, i.e. production, phases (see chart below) overlap substantially: northern summer/southern winter, northern winter/southern summer. This split across time is a major source of resilience. Fertiliser supply would need to be interrupted for an extended period to be a problem for all crops.

That chart, though, is only part of the story. Production does not split evenly between the Northern and Southern hemispheres. The charts below show the hemisphere split of production and exports for the major crop categories. The hemisphere split varies substantially across crop categories:

• Wheat production and exports are overwhelmingly from northern crops.
• Oilseed production is evenly split, but exports are more dependent on southern crops.
• Coarse grain (i.e. mostly feed) is in between: northern production dependent, but less northern export dependent.

This split across hemispheres has some important nuances. The quantities are not split across winter and summer crops in each hemisphere. Time limitations mean we have not yet done that precise split. Nonetheless, some useful generalisations are possible:

• Wheat: Southern production is almost entirely winter wheat. The north, though, produces both winter and summer crops. The winter crops, though, account for the overwhelming majority of northern production. Therefore, northern dominance is due to its winter crops.
• Coarse Grain: Corn, with an 84% share, dominates coarse grain production. Coarse grain production is thus primarily from summer crops. And northern summer crops dominate production. US, China, and EU corn crops alone account for about half of global coarse grain production. By contrast, South American corn crops account for about 12% of coarse grain production.
• Oilseeds: Summer crops dominate production with an 80-85% share. Northern summer crops account for a bit over half of that share. North-south balance in oilseeds is thus roughly correct even after the summer-winter split.

CROP CYCLES 

To identify where fertiliser supply interruptions might have the most impact, full crop cycles are required. The chart below shows the full crop cycle for the broad crop categories. From that, we can see where each crop group is in their cycle. Note that these cycles are where the most activity is concentrated. Some locations will be outside these standard cycles, but those exceptions are of modest scale.

GW3’s timing overlaps with all the major crop cycles, but with very different implications for each. The timing now means disruptions will impact the full northern summer and southern winter crop cycles. For northern winter crops, any impact will occur in the midst of their cycle. And, the southern summer crop cycle, nearer its end, will be least affected.

Fertiliser itself varies on several dimensions.

One important dimension is the timing of fertiliser application. Fertiliser use varies substantially across farms, so typifying practise is only ever an approximation. Moreover, growers vary fertiliser use based on its profitability. In that context, growers often apply fertiliser in three tranches. The first is around planting. The subsequent applications are at key development times for each crop. And sometimes the third application is optional (and likely price sensitive). The proportion at each stage varies by crop. Often, though, the planting application is about half the size of later applications. Therefore, the specific timing of fertiliser supply disruption matters.  

Another dimension is that crop selection determines which fertilisers are used. Nitrogen is the fertiliser most affected by GW3. Grain crops require nitrogen in some form, whereas oilseeds use little or none.

And, finally, some known unknowns:

• How much fertiliser is already available to growers?
• And how quickly will that supply run down? The disruption has started, but it is still moving through the supply chain.
• And geography matters. Some countries are more likely to suffer shortages than others.