Nitrogen fertilisers

The latest outlook on nitrogen fertiliser markets.

Key points

• Nitrogen prices have fallen considerably; however they remain above pre-inflation levels on the world and domestic markets, with anxiety around global events and the need for more imports into GB.
• The product mix in the domestic fertiliser market is changing, with the dominant ammonium nitrate losing market share and a growing uptake of liquid products in the form of urea ammonium nitrate (UAN).
• Despite current stability, risks remain in the nitrogen fertiliser market, with policy changes in the short- and longer-term. These combined should be motivating farm businesses to obsess about understanding and improving nutrient use efficiency.

Is this the calm after the storm?

Since 2021, nitrogen fertiliser markets at home and globally have gone through turmoil. The energy-intensive nature of fertiliser production links it strongly to the energy crisis in Europe. Domestically, fertiliser supply has gone through material changes – resulting in an increasing reliance on imports and changing the range of products on offer to farmers.

Demand for nitrogen fertiliser in Great Britain

The latest British Survey of Fertiliser Practice report details how, overall, total use of nitrogen across core products fell by 13.3% year-on-year in 2022. This drop in usage is attributed to notable declines of ammonium nitrate (AN) (-17.3%), urea (-11.3%), and UAN (-4.9%). Marginal increases were seen for more niche products as farmers looked for alternatives to mainstream products: calcium ammonium nitrate (CAN) usage, for example, rose by just over 6% year-on-year.

The sharp decline in fertiliser usage is no surprise. Interesting, though, is the change in market shares. In 2022, on a pure nitrogen basis and based on the collective of AN, urea, UAN and CAN:

• The AN market share fell to 61% – down 4% points year-on-year (YoY).
• Urea rose by less than 0.3% points to 14%.
• UAN rose by 2% points YoY to 22%; ten years previously the UAN share was only 12%.

The mix of the three main straight nitrogen products in the GB market subtly changed up to 2022, with further shifts expected when 2023 data is published. This lack of static market conditions means that farm businesses need to be more aware than ever of the value relativity between the different products. It is likely that AN’s current market share will continue to be eroded as legacy gas issues and structural changes to the supply base come to fruition.

The events of the energy crisis have had a material impact on the GB fertiliser sector. Late 2021 and into 2022 was all about the then temporary mothballing of domestic AN production – at the time dominated by the resulting crisis for food-grade carbon dioxide.

Now though, the realities of the UK energy market basically make it unviable to produce fertiliser from UK gas – an outcome that seemed quite unfathomable just five years ago. This disconnects (to an extent) domestic fertiliser pricing from domestic gas values, but clearly the connection remains at a European and global level.

Global pricing benchmarks

Unlike many of the agricultural commodity markets, fertilisers don’t enjoy very much freely available information. This is probably linked to the association of fertiliser more with energy and chemical sectors than food. This lack of information presents an issue for resilience of food systems if we consider the turmoil through 2022 and 2023.

However, there are some useful price benchmarks. Operating under the radar to an extent are several fertiliser futures markets. These are hosted by CME Group – one of the world’s leading derivative marketplaces, but probably better known in agriculture for hosting US maize and wheat futures. For those with detailed interest in futures markets, the CME fertiliser markets are financially settled against compiled price data rather than a traditional delivery mechanism.

Although only having a small market share in the UK, urea is the world’s commonest nitrogen fertiliser, and dominates the global price benchmarks. UAN also appears in the price benchmarks, and might become of increasing interest to the UK as the product’s domestic share grows.

Fundamentally, nitrogen fertilisers are competing for the same demand and, as such, their relative prices are important and informative.

GB farmers paying a higher premium for nitrogen due to reliance on imports

When comparing sources of nitrogen, it is important to compare on a nutrient content basis rather than headline product price.

For this analysis, the CME futures price for urea in the Middle East is converted to £ per kg of nitrogen and compared with domestic nitrogen fertiliser prices. The chart below shows trends from 2019 through to 2023.

As a traditional net importer of nitrogen fertiliser, GB has to operate at premium prices to global benchmarks to encourage imports to flow. Treating 2019 as a baseline ‘normal’ year (pre-Covid and inflation), the GB urea price was on average £0.15/kg nitrogen above the Middle East futures price.

Through 2022, fertiliser supply was in real distress, and heavily linked to the energy crisis. In 2022, the Middle East futures price moved from its normal sub £0.50/kg nitrogen to an average £1.18/kg nitrogen. On top of this, the UK price relative to the Middle East futures price extended to an average of £0.55/kg nitrogen premium – more than 3.5 times higher than ‘normal’ . This was the market trying to fill the void left by mothballed domestic AN production as a relatively small market within a distressed global market.

Since mid-2023, a level of stability has returned to the GB nitrogen fertiliser market. However, levels clearly haven’t returned to 2019 prices. Middle East futures prices remain stubbornly above the £0.50/kg nitrogen level (the same trend exists in US dollar terms as well).

In July–December 2023, the GB urea price was at an average of a £0.22/kg nitrogen premium over the Middle East futures – above the 2019 average of 0.15/kg nitrogen but less than half of the levels seen through 2022. This is indicative of the market being under far less supply stress than during the energy crisis but having to attract more imports than the pre-crisis era.

Prognosis for 2024

Despite a relatively calm end to 2023, there is little room for complacency toward the fertiliser market. Instability in the Red Sea region and broader Middle East is a new dynamic that markets will be weighing up, and is a risk operators, insurers and shippers will need to manage.

So far though, and relative to the headlines, markets remain relatively calm. However, Middle East urea prices rose in January, and in terms of £ sterling averaged around £0.66/kg nitrogen for the month – vs £0.55/kg nitrogen in December, but below the levels in September and October.

Urea prices will continue to be exposed to Chinese production and export policy, Indian imports, and subsidy – to name a few drivers. As China is the world’s main source of nitrogen, these dynamics will continue to influence other products. It feels unlikely that Middle East urea will consistently return to sub £0.50/kg nitrogen levels associated with the pre-inflation period.

Global crop prices will continue to influence fertiliser prices: Fertiliser prices will continue to operate between the ‘rock’ of energy costs and the ‘hard place’ of crop values to keep production online and maintain demand from farmers. The key point here is that material increases in crop prices will also allow world fertiliser values to rise if markets have confidence in farmer demand. This is by no means a new risk, but the values involved are clearly now much larger and so the risks are enhanced.

Domestically, the UK’s increased reliance on imported nitrogen fertilisers will continue to drive the volatility of the price relationship with the world market. The UK is a small importer, and so the domestic market must work hard to attract attention of global traders. On the flip side, suppliers will be keen to understand just how much demand there will be in 2024. This will be massively complicated by the weather issues last autumn and through the winter. This will not only impact crop areas, but crop conditions that may well influence application rates.

Some new drivers are anticipated in the GB nitrogen market in 2024. From 1 April, changes will be implemented to the regulation and use of urea-containing fertilisers. The Option Four initiative was introduced by an industry consortium in response to government-proposed changes that created a material risk to access to urea fertiliser. Option Four dictates that any solid or liquid fertiliser containing more than 1% urea, applied between 1 April and 15 January, must contain inhibitors, with effective protection to reduce ammonia emissions. The only exception to this rule is the use of a urea-containing liquid fertiliser, without inhibitors, on the recommendation of a FACTS qualified adviser.

There is a clear weariness towards the arrival of inhibitors, especially towards the return on investment through improved nitrogen use efficiency. Urea with inhibitors will need to find a relative level in the market – somewhere between traditional urea and AN/UAN. Farmers are encouraged to be inquisitive towards the inhibitor products on the market and seek out further information – selfishly driven by driving nutrient use efficiency. To support competitiveness, the domestic market needs to maintain connection with the world’s main nitrogen fertiliser, urea.

Looking forward, the UK government have consulted on the introduction of a Carbon Border Adjustment Mechanism (CBAM). This is expected to be implemented in 2027, and will place a carbon price on certain goods imported to the UK in emissions-intensive industries. The price will reflect the difference between the carbon price of the product in its country of origin and the equivalent price had it been produced in the UK. The CBAM is also in development in the EU.

Fertiliser is one of the goods that has been initially earmarked to be included in the CBAM, alongside cement, hydrogen, steel and others. It is reasonable to assume that, following introduction of the CBAM, there will be a price implication for fertilisers. This initiative and its effects on the market will be an important watchpoint as the policy develops and the domestic fertiliser supply evolves.

Conclusions

Nitrogen fertiliser markets are in a period of unnerving calm following the crises in 2022 and early 2023. Global and domestic prices though have failed to retreat to the pre-inflationary levels, and would need to see further retreat in energy prices to do so. GB has seen structural change to its nitrogen fertiliser production base, with domestic gas no longer being a feedstock and imported ammonia being used to produce AN. The means that the UK has grown its deficit in nitrogen, so the market must work harder (higher premiums) to draw in imports.

Calm after a period of volatility can quickly result in complacency. Risks facing fertiliser remain real – especially given the impacts of instability in Russia and Ukraine as well as the broader Middle East.

Farm businesses will need to continually assess what source of nitrogen is best for them, at what rates, and whether additives such as inhibitors can help drive efficiency. A relentless approach to driving nutrient use efficiency over the coming years will likely be a foundation stone of broadacre crop production.

Sign up to receive the latest information from AHDB