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This is the first part of a three-part series that will cover the current issues with fertilizer, the farmer's perspective on fertilizer applications today given current constraints, and technologies and farming systems that are reducing use and dependence.



Crops need a few key ingredients to grow; water to sprout and provide transportation through the plant, sunlight and air for photosynthesis, and nutrients, the three most important of which are nitrogen, phosphorous and potassium. While soils have ample amounts of these nutrients, there are a number of reasons why they may not be available to the plant. This is where fertilizer comes in. Fertilizers in some form have been applied to soils for hundreds of years.


But it was the green revolution in the 60s and 70s that saw a huge increase in the use of chemical fertilizers. In fact, according to World Bank data, fertilizer consumption has gone up from 71 kilograms per hectare of arable land in 1976, to 136 kilograms in 2018. Due to their increasingly widespread use, fertilizers, especially nitrogen fertilizers, are in the top three expenses for farmers in the US, and farmers spent $24.4 billion on fertilizer in 2020, according to USDA data. And this was before the cascading events that have led to some of the highest fertilizer prices in history.


The price of fertilizer has skyrocketed over the past two years with both supply and demand getting hit by external shocks, from the pandemic to a slew of supply chain and geopolitical issues. As of May 2022, fertilizer prices rose 30 percent since the start of the year, following last year’s 80 percent surge. A recent study found that feed grain farms could face an increased cost of $128,000 per farm in 2022 due to higher fertilizer costs.


In this article, we will take a deep dive into the fertilizer supply chain and the reasons for and implications of farmers' difficulties in obtaining fertilizer, as well as the environmental concerns around fertilizer that are also encouraging a shift away from its use in agricultural operations.


NPK: Breaking Down Supply Chain Challenges

Nitrogen (N), phosphorous (P) and potassium (K) are the primary nutrients in commercial fertilizers but their differences when it comes to sourcing mean they face some unique supply chain issues.

A graph of Belarus, Russia and Ukraine Fertilizer Exports


Potassium

Most potassium that is used in agriculture comes from the mining of potash which includes a variety of minerals and ores that contain potassium. Unlike with nitrogen and phosphorous, global scarcity is not really a concern when it comes to potassium, rather the issue with the supply chain lies in the concentration of supply. There are a limited number of countries that produce potash and even fewer that export it. Canada, the top global producer, produces a third of the world’s potash. In March of this year, workers with Canadian Pacific Railway Ltd. voted to strike if their demands were not met. This could have a substantial impact on potassium fertilizer supply for the 2023 growing season.


The other major potash producers are Russia and Belarus, which together control 40 percent of the world’s potash supply. The US imports 1 million short tons of potash per year from Russia, according to the Department of the Interior. Imports from these countries have become difficult due to escalating sanctions following the Russian invasion of Ukraine, but concerns that fertilizer supplies from Russia would be completely shut off have not panned out so far.


The periodic symbol for phosphorus

Phosphorous

Phosphorous exists primarily in the Earth’s crust. Phosphorous fertilizers are created by mining phosphate rock and treating it with sulfuric or phosphoric acid so that it can be made available to plants.


Most of the phosphorous farmers use today is mined from a few sources of phosphate rock located in China, the US and Morocco. China alone produces more than 40 percent of the total processed phosphates. Last year, China banned the export of phosphate through at least June 2022 to assure domestic supplies.


Another issue with phosphorous supply is its finiteness; some projections show that these sources could run out in 50 to 100 years. According to some estimates, China might have only a few decades left of supply and US phosphate production has dropped by about 50 percent since 1980. In a 1959 essay, the writer and chemist Isaac Asimov referred to phosphorous as “life’s bottleneck.”


There are many experts that believe humans will never extract all of our phosphorous and point to the fact that whenever we have needed more of the element we have found it. But the unequal distribution of phosphate rock adds another layer of complexity with countries with large farming populations like India heavily dependent on phosphorous imports, while Morocco and Western Sahara, hold more than 72 percent of all global phosphate-rock reserves. As other reserves become more costly to utilize, the region could have a strong hold over phosphate supply which would have major implications for global food security.



Nitrogen

Unlike phosphorous, nitrogen fertilizer can be produced in a factory and therefore has essentially become a replenishable resource. While nitrogen makes up three-quarters of the air we breathe, it must be converted to ammonia before it is accessible to plants. The Haber Bosch process, invented in 1909 enabled us to produce ammonia by synthesizing nitrogen with hydrogen under high heat and pressure conditions. According to energy researcher Vaclav Smil, more than 3 billion people are alive because of our ability to synthesize nitrogen fertilizer which allowed for the tripling of global grain production during the Green Revolution.


One of the biggest issues with nitrogen fertilizer supply and price today is its dependence on natural gas. Natural gas is used as a hydrogen source as well as to provide the energy needed for the process. US natural gas prices doubled between the summer of 2020 and the end of 2021, and they have already doubled again since the start of this year. Rising natural gas prices in Europe led to widespread production cutbacks in ammonia production and many EU nitrogen plants have temporarily or permanently closed. Soaring prices of coal in China also forced fertilizer factories to cut production there.


As a result, export blockages have also plagued nitrogen fertilizer. China, which exports 10 percent of the global urea supply, canceled all exports at the end of 2021. In 2021 Russia, which exports nearly 20 percent of the world’s nitrogen fertilizers, imposed export quotas on nitrogen fertilizers to ensure domestic supplies and contain price inflation.


Impact Imbalances

While North American farmers will probably get their fertilizer even at an extremely high cost, Latin American countries are more vulnerable to fertilizer disruptions, particularly Brazil which imports about 85 percent of its fertilizer. If farmers in those countries cut back on fertilizer use and their yields subsequently fall, it could significantly impact global food supplies. Brazil, for example, is among the world’s top three exporters of corn, soy and sugar as well as chicken, beef and pork.


Supply chain disruptions are also impacting a number of other vulnerable countries such as Mongolia which has 98 percent of its fertilizer restricted, Nicaragua which has 80 percent, Ecuador with 74 percent, Cote d’Ivoire with 63 percent and Cameroon with 60 percent, among others. Africa, which had limited fertilizer use before these price hikes (an estimated average of 25 kg per hectare, a fraction of the global average of 121 kg/ha), will be particularly impacted by a decline in fertilizer use that could lead to substantially reduced agricultural productivity in the continent.


Algal blooms on a body of water
During rain events, excess fertilizer often runs off into surrounding bodies of water, sparking algal blooms that decrease water oxygen levels and harm aquatic species.

Environmental and Health Concerns

In addition to supply shortages and obstacles, another factor that is encouraging reduced fertilizer use is the associated environmental concerns. One issue with fertilizer is its energy use, particularly for nitrogen fertilizer production. It takes a lot of energy to produce ammonia, most of which comes from burning fossil fuels. In fact, ammonia manufacturing currently accounts for between 1 and 2 percent of worldwide carbon dioxide emissions. Scientists are currently working on reducing the high temperature and pressure needed to produce ammonia which would make it easier to run fertilizer plants on renewable energy and would allow ammonia to be made in smaller factories in developing countries.


But perhaps the biggest environmental concern with fertilizer is its impact on our water. When fertilizers are applied to soils and not managed properly, excess fertilizer runs off the soil and into waterways. About two-thirds of applied nitrogen and more than half of applied phosphorous is not used by crops. During rain events, this excess nitrogen and phosphorus leach out into surrounding water bodies which sparks algal blooms in a process known as eutrophication. These blooms decrease water oxygen levels, leading to mass die-offs of fish and other aquatic species.


According to one study, phosphorous pollution impacts almost 40 percent of Earth’s land areas, and according to another estimate, the impacts of excessive phosphorous and nitrogen application on water quality and ecosystems in the US costs $2.2 billion per year.


Lastly, excess fertilizer can leach into nearby drinking water. Research has shown that years of drinking nitrates can lead to cancers and birth defects in impacted communities, even at concentrations lower than current limits. While bigger cities have sophisticated water treatment plants to remove chemicals, most small agricultural towns do not. And studies have found that nitrate pollution in tap water is much more common in low-income communities. For these towns, building a plant can be a debilitating expense. Unused fertilizer builds can leak into the environment for decades, despite well-intentioned efforts to reduce nutrient pollution.


Because of these impacts, some countries, particularly in Europe, are developing policies to reduce fertilizer use. In November, the EU parliament voted to adopt a farm-to-fork strategy that targets a 20 percent reduction in fertilizer use by 2030.


We believe the convergence of global events leading to severe supply chain disruptions, as well as growing concerns around the impacts of fertilizer use, are causing many farmers to reevaluate their approach to fertilizer applications and explore other alternatives both in the short and long term for more permanent operational changes. In our next article in this series, we will explore how farmers are navigating these fertilizer challenges and some of the solutions they are considering. Image sources: Adobe Stock unless otherwise noted.

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The Fertilizer Dilemma: Broken Supply Chains and Environmental Impacts

The Fertilizer Dilemma: Broken Supply Chains and Environmental Impacts

AUTHOR

Aaron Rudberg

Managing Partner

Aaron is excited about investing behind entrepreneurs that are helping farmers build more profitable businesses and meet the demands of the changing consumer. He has worked in the investment business his entire professional career, and brings experience as an entrepreneur and institutional investor.

CO-AUTHOR

Josie Lane

Art Director

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