Impact of the Russia-Ukraine War on the Fertilizer Market

The War between Russia and Ukraine has officially entered its second month and there’s no sign of a ceasefire.

There are different signs, however, of the worsening choke in supplies of commodities coming out of these two countries.

The importance of fertilizers, for instance, can be hardly overstated. Production of synthetic ammonia fertilizers about a century ago is what boosted the world’s food production and freed humanity from its Malthusian constraint (a hypothesis that food production will not be enough to sustain the exploding human population).

Therefore, a disruption in fertilizer production and exports will upend farm production across the world leading to higher farming costs and consequently higher food prices. Unfortunately, we are there already, with the War exacerbating this crisis (with global fertilizer prices having risen 29% ever since the conflict began).

So, with Russia being a big player in the fertilizer market, well, let’s just say that imposing sanctions after sanctions on the country may sound like a flex on the outside but on the inside, it is far more self-inflicting for the West, and also for India by extension.

The Market, Disrupted

The word fertilizer, essentially refers to any natural or chemical substance added to soil to increase its fertility. Now, understand that these are usually complex industrially-processed compounds which include a varying range of constituents. But the three most important macronutrients that farmers rely on abundantly are: Nitrogen, Phosphorus and Potassium (NPKs, if you will).

For those of you in India who recall their Class 12th Chemistry textbooks, remember the famous Haber Bosch process used to produce nitrogen fertilizers? It involves production of ammonia, the fertilizer’s base, by synthesising nitrogen from the air and mixing it with natural gas. Which suggests that any country with ready access to natural gas can be a producer of nitrogen fertilizers. Anybody we know fit that resume?!

Yes, Russia. It is one of top exporters of fertilizers, especially phosphates and potash. Russia and its neighbour/ally Belarus together make up more than 40% of the global potash market. This becomes even more important when you realise that both these countries are low-cost high-volume producers, unlike say, Canada which, despite leading the world in potash production, isn’t a dominant global exporter beyond North America. Russia has such a readily-exportable fertilizer stock that it collectively hits all the continents when its supply is halted abruptly.

So, naturally, countries like India and Brazil, which are major importers of fertilizers, largely rely on imports from Russia. In fact, Russia, Ukraine and Belarus combined contribute almost 12% to India’s total fertilizer imports.

To be fair, fertilizer prices have been rising for a while now. Since January 2021, international prices have shot up through the roof — ammonia (220%), potassium chloride (198%), urea (148%), di-ammonium phosphate or DAP (90%) etc.

Reasons: supply chain crisis, increase in oil and gas prices and the rising inflationary pressure in a post-pandemic recovery era. The Russia-Ukraine War is adding to those pressures further as a result of halted trade and supplies due to sanctions.

With no visible end to the conflict in sight, shortages are expected to continue which could possibly even lead to lower per-hectare yields (due to farm optimisation). Yield may reduce even further if a large section of farmers decides to switch to less fertilizer-intensive crops to cut back on production costs.

This would perhaps be an opportune time for countries like Canada to raise fertilizer production seeing as they possess the required bandwidth to do so. However, potash miners based in Canada are reportedly not inclined to raise production. This might also have to do with the motive of war-profiteering and profit-booking, something that has actually happened very recently.

Impact on India

As seen, almost two-thirds of India’s potash requirements are met from Russia and Belarus. As a nation, India is highly dependent on imports in plant nutrients, be it directly through fertilizers or indirectly through fertilizer raw materials (natural gas, sulphur, rock phosphate etc.) and intermediaries (ammonia, sulphuric acid, phosphoric acid etc.). We did achieve self-sufficiency in urea production temporarily around 2000 which changed due to unfavourable policy changes.

Now, if the War continues to stretch beyond a few months, supply constraints will continue to worsen further. In the absence of favourable import alternatives, domestic production infrastructure will take a while to become operational.

Having said that, the Indian fertilizer market can take some salvage from the fact that it is a controlled market. Ever since independence, the Government has kept the market under certain checks by controlling retail prices through subsidies. This mechanism ensures that farmers are shielded from sudden price shocks which would have happened if it were a free market.

But the downside to that will be reflected in the form of a big fat import bill. With international prices pushing further upwards, India will have to pay more for imports and widen the subsidy margins to buffer against retail shocks.

However, this was something that was not in the Government’s immediate fiscal plans. The Government had announced a reduced allocation for fertilizer subsidies this year (down to ₹1.05Lcr ($13.7bn) from ₹1.4Lcr ($18.3bn) in 2021–2022). This was done in the hopes that prices would decline from the elevated levels of the current financial year. Alas, the War in Ukraine has thrown all such calculations into disarray.

With oil prices putting more and more pressure on the import bill every day, rising fertilizer costs will add insult to injury. This could also widen the fiscal deficit because without reigning in subsidies there wouldn’t be enough cushion to pay for the inflated subsidy bill.

Having said that, all of India’s problems with fertilizer shortages could be solved if it was able to procure the required quantities from elsewhere. To that effect, talks are ongoing with producers in Canada and Israel to procure enough for the incoming sowing season in summer. India has also signed agreements with Canada’s Canpotex to beef up potash supplies.

It might also be time to disengage from supplies in the Black Sea Region for now and look for alternatives like China and Saudi Arabia from where nearly 60% of India’s DAP demands are met currently. A planned import diversification regime coupled with slight market decontrol (with necessary retail price hikes) could be used to tide over these uncertain times and prepare farmers for the seasons ahead.

(Originally published March 25th 2022 in the TRANSFIN E-O-D Newsletter)