The Jacob Shapiro Podcast - Fertilizer 101

Hello, listeners. Welcome to the podcast.

Hello, listeners. Welcome to another episode of the Jacob Shapiro podcast. Joining me on the show today is Josh Linville, vice president of fertilizer at Stonex. Somebody I've been wanting to get on the show for a long time joins an illustrious list of guests who I've reached out to, randomly on social media and who said yes to me without knowing me from a hole in the wall. So thank you, Josh, for making the time.

This is a conversation. It's about fertilizer. So I tried to widen the aperture at the beginning, give us the basics, and then get nerdier and nerdier as we went down and give listeners, if you're not familiar with this market, some of the tools to try and understand what's going on. I asked a a question to Josh in there about organic options there at the end. If that particular question piqued your interest at all, you should email me at jacob@jacobshabiro.com.

It's a place that I'm actually actively involved in and thinking about alternatives. So if you have questions about that, if you're interested in that, that's 1 to email me about, in general. Because, I don't talk a lot about what I'm actually doing and some of my other things, but that's 1 area where I'm actually doing things besides podcasting. I think that's all I have. Take care of the people that you love.

Cheers, and we will see you out there. Listeners, we've got Josh Linville in the pot cast after some technical difficulties, but we're here. We were joking. He thought the war wasn't gonna last more than 2, 3 days. I thought it was gonna be 2, 3 weeks.

And here we are in week 8. Josh, thanks for joining us to talk about.

Absolutely. I I wish we had better news to talk about, but I think we need to talk about it anyway. Right?

Yeah. I I think we need to talk. I mean, it may I mean, this is I I think this is creative destruction. It will create some problems, and it will also create opportunity. In the short term, though, it's definitely especially if you're in an emerging market and you're importing fertilizer, it sounds like you're not gonna be doing so well.

But before we get there, I would say the bulk of my listeners don't know fertilizer from a hole in the wall. So I wanna start this at a very basic level for you, and then we will start to get sort of down into the weeds on a nerdy level in 50 minutes. And we probably won't cover everything we need to in 50 minutes. We'll probably have you back. So I wanna start by quoting Jeremy Irons in Margin Call and say, you know, pretend I'm a Labrador retriever.

Explain to me in a very simple way how the global fertilizer market works. What types are there? Why are we also focused on the straight of hormones?

Yeah. So if you take fertilizer all the way down to a basic thing most people would understand, if you want your green or your grass to be really, really dark green, you want it to be full, lush, things like that. What do you do to it? Put fertilizer on it. Right?

That's what helps it grow more. That's what helps it fill out. You do the same thing with crops. Without fertilizer, your crop you're planting cannot grow nearly as much as what it does with the fertilizer. So there's 3 main types that we watch, nitrogen, phosphate, and potash.

Now there's all sorts of microbes and things like that. There's zinc and sulfurs and all these sorts of things that are out there but for the most part, the big 3 that we watch are those 3 products. And there's different types within those categories, right? For nitrogen, we typically look at urea, UAN, anhydrous and those are urea is a dry fertilizer. You can apply it by hand if you want to.

UAN is a liquid. Anhydrous is actually a gas, a very dangerous gas. You get that stuff in your lungs, it's very nasty, it will burn you but it's also 82% nitrogen, it's the cheapest source of it. Phosphate, there's all sorts of different types. For the most part, we follow DAP and MAP.

Potash is kind of boring. There's potash. There may be a couple different analysis for potash but there's just potash. And when we talk about the straight up hormones and why it's important, this is impacting the nitrogen and the phosphate side. Potash not as much but the nitrogen has been the major major story.

I mean it seems like no matter where you go on the internet now, fertilizer being talked about. Most people in the world didn't even know what this stuff was or they existed prior to about 2 months ago. So nitrogen, a huge huge amount of the product that is shipped around the world mainly urea, again that's 1 of most used around the world, comes from The Middle East. Phosphate, also a major manufacturer back behind the Strait Of Hormuz, and it's got 2 major inputs. It's got anhydrous and it's got sulfur.

Well, anhydrous is stuck behind the Strait Of Hormuz, and half of the world's global tradable sulfur supply comes from the Strait Of Hormuz because of all the refineries. So we're seeing these 2 products get extremely, extremely tight during the worst time of year. Farmers right now, they are fertilizing. They are planting. They are taking the first steps to growing the crop for 2026.

And they're looking around and they're saying, if I can find the product, the price is obscenely, upsettingly high. And frankly, my grain price is doing nothing to help offset it. It is a worst case scenario for the agricultural market.

I think a lot of listeners will know that the 1 of the reasons the Strait Of Hormuz is important is because there is a lot of oil in The Middle East. What are when we're talking about nitrogen and phosphate in particular, why are those things in The Middle East? Like like, I'm I'm trying to think very simply through, is it this is there a resource that is in The Middle East that is also there? Is it about production capacity? How did we get to the point where fertilizer and not just oil is something that is gonna be so exposed to Middle Eastern political conflict?

When you go and you drill for oil, what do you typically find with that oil? Natural gas.

Natural gas. Yeah.

And what's your major input for nitrogen fertilizer production? It's natural gas. So when their options were, well, we've got all this natural gas and we don't know what to do with it, I can either burn it off or I can create this nitrogen fertilizer that everybody in the world needs to eat food, go to the grocery store and actually have something available to me and I can make a tremendous amount of money on that as well. Let's just go ahead and put the investment in and let's upgrade it. And so that's why through the stray horse moves, about a third of the world's exported urea comes from that part of the world.

If you start to draw in The Middle East and North Africa, about half of the world's urea exports comes from that little part of the map. And it's all tied to that cheap cheap natural gas.

Why is The United States not a bigger player here?

That is a great great question and something I have been pounding my head against the wall for years honestly, but even more so here in the last 8 weeks. When you look at our gas supply, we've got really good gas supply. Right? Our price is really cheap. You look at Henry Hub, that price has done nothing with all the stuff going on around the world.

That thing has done nothing. We do produce most of our own anhydrous. We produce most of our UAN, but we import about 5,000,000 ton of urea per year. There honestly, there's no reason for it. We can produce it here, and I don't care if it's in The US.

I don't care if it's in Canada. We have the demand. We have the input supply. We have politically speaking, yeah, we never know what the world's gonna happen every 2 to 4 years. But speaking as far as, you know, stability, we're about as good as it gets.

There's no reason why we shouldn't. Unfortunately, the cost to produce those facilities is massive. I mean, to make a brand new world scale production facility, we estimate somewhere between 3 and 5,000,000,000 US dollars.

Well, that's your answer right there. Is Yep. Was The US ever ahead on this? I mean, The US was 1 of, if not the main oil producers in the world going into the sixties and seventies, and then, you know, Texas starts to fall off a cliff and the Middle East rises and everything else. Was there a an an associated decline in US fertilizer production?

Are we using more than we ever did then? How has the market changed since the last time The US was an energy superpower? Because there was a, what, 30 year, 35 year interregnum where we were incredibly dependent on The Middle East and we had no other options. We don't have to be now because of the shale revolution, but that's 2008. There's a 35, 40 year period that explains our adventures in The Middle East and everything else.

How do we map that on to this conversation?

Yeah. I don't know if there's ever been a time where we weren't an importer of urea. I don't know that we've ever been ahead of the demand, but I would also tell you that historically speaking, at least from a nitrogen fertilizer standpoint, the world used to have more than enough production capacity. When you looked at it, I mean and this is the thing that frustrates people. They always go back and they say, well, man, if you go back, the prices never moved.

They never had any issues. I never had to worry about supply. It was always there. That's because production capacity way outweighed what demand was. And we've had a twofold problem.

Number 1, all the manufacturers just decided I'm not gonna spend the money to increase production and do all these things. If there's so much out there and I'm not gonna get a return on my investment, why am I gonna do it? So you have seen demand or production growth. Don't get me wrong. There has been new production.

But unfortunately, at the same point, we've gotten really good at growing a crop. Growing a crop requires more nitrogen. So our demand has been raising quite a bit faster. And we've gotten to the situation and this was our big talking point in the last 2 or 3 years. Guys, we need to expand production.

Here, we need to expand it around the world. We don't have the excess capacity like we used to. It used to be, let's just say China stopped exporting like they are now, which hadn't happened in the past, we're okay. We'll just call in another place. We don't have that other place anymore.

We don't have somebody else we can go to and say, hey, turn this on. We need a little bit more. You're our relief valve, if you will. That doesn't exist today. We're living on the razor's edge.

And now all of sudden, the worst situation we've ever seen from a global supply, we just have nowhere else to call these tons from.

It's it's a great answer because you can easily flip what you just said if you're a supporter of globalization or free trade, and that's the whole 0.1 man's razor's edge is another man's lean just in time supply chain. And so when the global system works perfectly, you have a minimum amount of waste and you get specialization in the or the the specialization from some countries that are able to produce this, you know, the energy producing countries in The Middle East. Part of what I think you're saying or at least what I'm hearing is that if you're talking about a country like China or countries that are in The Middle East, like, let's say, Saudi Arabia or some of these others, these are ones that don't care about the normal business cycle. They don't necessarily care about profitability. So the Chinese Communist Party says, we're gonna do fertilizer, and we'll we'll spend the money to set up the facility, and we make the money back.

Cool. That's great, but it doesn't really matter from that point of view. Ditto, you know, your Gulf countries who have been spending money hand over fist to build cities in the middle of the deserts and all kinds of things. Is is the answer to some of this at least that it doesn't make or at least that the way that the market is structured, it didn't make sense to have that kind of CapEx outlay? And is is that something even now that the government is gonna have to do?

Should we think of it like rural electrification that the government has to step in here because it's too big for private industry to deal with? Does the price get high enough that private industry does deal with? Like, how do you wrestle with that question?

So yeah. You're right. In the past, we never had to worry about it. Right? Because we never had anything like this.

We had a shell of this back in 2122. Europe had shut off the cheap Russian gas flows. They had production problem with their nitrogen. We were fearful we were gonna lose Russian exports. They are a major phosphate potash exporter.

I mean, you had freaking Starbucks and McDonald's pulling out of there to say, nope. For what you've done to Ukraine, we're not gonna support you. It was a pretty easy step to say, nobody's gonna buy their fertilizer either. So that was a bad situation, but this is so much worse. And I do hope that 1 of the silver linings of this, if we're gonna go through all this pain as an industry, we need something to come of it.

We need to learn a lesson. We need a step forward because of it. I hope that is some sort of a support for more production. Now folks might sit there and say, well, it'll be okay, Josh. China's gonna start exporting pretty soon at these values.

They're gonna make a pile of money. You're right. But you're looking at it from a capitalistic point of view. I do the same thing and I have to remember, step back, put yourself in their shoes. And my big thing, right, wrong, or indifferent, my point of view on China, they're a communist country.

What is a communist country's biggest danger? It's not The US attacking. It is not, you know, capitalism taking hold. It's an uprising by your own people. Right?

Well, from a Chinese government standpoint, if you keep these exports from happening, if you blockade them and say you're not allowed to export it, and frankly speaking on the Chinese government, you're gonna do what I tell you to do. I'm gonna accomplish 2 things, more than adequate domestic supply and a much lower domestic cost of urea than the rest of the world. And what does that do? 25% of the population is tied to agriculture. You just made 1 out of every 4 people happy with you, and happy people don't revolution.

So and people said to say, well, look at the cost. Look what they can make make. You're absolutely right. They would make a pile of money exporting right now. But look at what China does and the numbers that they work with.

The amount of money they'd make on the fertilizer exports isn't even a rounding error. It's just it's such a different beast than what we're used to living in. Mhmm. So yeah, I think market has opened its eyes and I think I am hoping 1 of the big things is people are talking about, you know, we should have a strategic fertilizer reserve. I disagree with it.

The quality issues, if there is a problem, who gets it? Where does it go? What's the price? There's a lot of questions that'd be hard to answer. If we wanna fix this from a nitrogen standpoint, why don't we just support a brand new production facility with a brand new company?

People talk about there's no there's no competition. It's an oligopoly. Okay. More production with a new player is more competition. It for me, it checks a lot of the boxes.

I'm not the smartest person in the industry. Trust me. My paycheck shows that. But I think that's what helps solve a lot of the woes that we have. We can produce more here.

We're less reliant on these world events. We have a new production facility. That's more production capacity. It's a new company running it. It's more competition.

It helps get us further down the road. So if this ever repeats itself, which probably won't, but if it ever does, we're sitting in lot better spot than we are today.

Yeah. Even with the market being awake, the problem is gonna be and this is across different supply chains. This is not just a fertilizer story. China is the path of least resistance, and Donald Trump knows that. There's a reason that he is so hot to trot to go talk to Xi Jinping next month, and I'm sure it will be a, you know, meeting of much fanfare and media and all sorts of agreements and things like that will be announced in the context of it.

And if the market can get to the point where we're not talking about the Strait Of Hormuz closed anymore and the choices between, okay, we just gotta somehow pony up what was the number you used? 3,000,000,000, 4,000,000,000 for this facility to do this here versus I can get it for cheap from China and not really much changes in my daily life. I understand the government has to worry about geopolitical threats, but I'm worried about what I'm growing today. And if they're cheaper and if the product's good, what do I care? But, yeah, just just take that any way you want.

Yeah. And that's the thing. You never have a farmer who when they go to buy, like, their urea, they're not asking where this stuff come from. You know, is this Russian made product? Because I have a problem with Russia and them invading Ukraine.

Is this Chinese product? I have a problem with communism. Is this this product? Is it that product? It's price.

What is the price? Are you the lowest price out there? That's what it ultimately comes down to. We're it's exactly right. We need the path to release resistance, the path to lowest pricing out there.

And the world has provided it for years and years and years. We can't sit there and say today's situation is normal, but I also think we have to question what normal is gonna be past this point.

Well, yeah. And to your point, I mean, we are awash in energy resources here in The United States. I'm down here on the gulf myself in New Orleans. And I mean, every time I get home to New Orleans at night and I drive from the airport to the city, I see them flaring off the the natural gas. It always feels like I'm in a Blade Runner movie or something like that.

By the way, I just I just, like, captured all of the the the trite things that I always repeat in just a sentence there for regular listeners. But if you if, you know, if if you're burning all that stuff off, to your point, it seems like well, I I guess the question is, like, know, how much and can you get the funding to increase that type of production inside The United States? And it sounds to me like what you're saying is is no. Like, could a bunch of farmer co ops get together and try to do something like this? Could the energy companies try and do something like this?

Can you and I break out on our own and just go build a facility next to where there are already flaring natural gas? Like, I mean, small amounts here might move the needle. Why why is that a naive take?

Because let's just say you and I, we've got $4,000,000,000 and we can go build it. And we're like, hey. We're doing great. We got $4,000,000,000. How excited are you to spend that $4,000,000,000 on nitrogen production?

If it means I get to eat dinner, I'm pretty excited, don't you?

That's true. But most people aren't that forward looking. Right? Most people are gonna sit there and say, well, there's a lot better opportunity in AI. I can make a lot more.

Heck, I can make a darn good living just putting this into stocks and bonds. And there's a lot of other exciting, guess, sexy is probably the best way to say it, investments out there. Fertilizer is 1 that you're going to scratch your head and be like, you want to put the money in what? That makes no sense. Why would we mess with that?

And I think it's what we get. That's why you don't see a lot of new entrants into the marketplace. You look at it from an investment standpoint. If you go to them, you say, hey, wanna invest in something like this to produce it. They want a guaranteed return and a path to that.

It doesn't exist. The market doesn't trade that far out. It's a season to season market. Grain markets, can go a couple years out in the futures. Fertilizer, you can't.

So if you gotta go borrow that money from somewhere, you're not gonna meet the requirements that they want. And if you have the money in hand, you're probably not terribly worried about investing in something like that. So the parties that are there stay in it. They specialize in it. Outside parties, there's a lot of other things in the world you can invest in.

This is 1 of the the things that is so maddening from a policy perspective because The United States spent over $11,000,000,000 in the first week of the Iran war. We don't know what the bill is gonna be eventually, but I think it's we're coming up to 28,000,000,000. Is it closer to 50,000,000,000? I forget. I was trying to find the exact statistic.

You know? But, yeah, to your point, like, and I, we don't have 4,000,000,000 to spend, but the United States government could have fired a few less missiles or sent 1 less ship, and suddenly we could have a domestic, fertilizer industry, which I know maybe makes people feel differently, but this is also a government and an administration that has said, sure. You can export those chips to China, but we want a a royalty on it. Or, hey. We're gonna buy 10% of this company that produces rare earth and critical minerals for the United States government to have that share.

It doesn't seem like that much of a leap. And yet while this is all going on, we're either bombing them, you know, into the medieval times or we're arguing about paying TSA workers. There's just a fundamental mismatch between the policy conversation that's happening here and the policy conversation, to your point, that has happened for decades in a country like China, which has the infrastructure set up to already profit is the wrong word, but to look a lot more forward thinking and a lot more resilient in a world where these types of disruptions are going to become more normal. Is that fair?

I think so. And 1 of the things I always sit there and say, every country in the world shares 1 commonality. Your job is making sure your people can eat. Right? You can talk about the wars.

You can talk about your environmental approaches. You can talk about all these different things out there. At the end of the day, you've got to make sure your people have food. That is at the core of this entire conversation. I can't remember what organization said it, but something like if the fertilizer market didn't exist today, 1 in, like, 4 people would starve to death.

And I mean, these these kind of situations, I don't think we're that far down the path, but those are the things that worry me. Right? I was a kid of the eighties. We grew up starting kids in Africa and all of the, you know, the concerts and the benefits and things like that. This path continues.

The straight of Hormuz remains closed. Those are the types of stories we start to have. We can fix this. We've got the finances. We've got the input.

We've got heck, you want talk about the environment side. People don't wanna produce more production. It's dirty. It's gonna get produced somewhere and we can do it a lot cleaner than everybody else out there. I know just because you don't see it in our country, that makes you feel better.

But if it's in some other place around the world, their requirements, their environmental regulations are not gonna be as high as ours are. So I think we can I think we need to play a big part in helping solve this equation because if we don't, who is going to? And these things don't happen quick. Right? It's a multiyear construction project from day 1.

So we've gotta start today.

Yeah. Although, that's another problem. Like, China could just if China had not already done this, they could have decided to do it and had it up in 6 months, whereas the permitting alone on this thing would probably take us 2 or 3 years. I I actually think you're low on that 1 in 4 number, and I'll I'll put this in the show notes for listeners. I I often share a chart in my presentations when I'm talking to ag audiences about the percentage of the world population that is estimated to depend on synthetic fertilizers, and it's about half.

I mean, we're talking 3 and a half, 4,000,000,000 people. Now that's, you know, that's if you turn synthetic fertilizers to 0. If you get absolutely 0, then you're gonna, like, risk 3.5 to 4,000,000,000 people, which even with what we're talking about in Hormuz is not what we're talking about. You mentioned some I got down into my nerdy path already, so I wanna go back to Labrador Land for a second. And you mentioned something that I think is really important, which is also we use oil and gasoline and LNG and all these things every single day.

Farmers don't use fertilizer every single day. It's seasonal. And in in this sense, the timing was really bad because farmers are using fertilizer right now. So I wanted to ask you to talk a little bit more about that and to ask sort of the obvious question, which is, does it even matter if the war is over tomorrow? Is this problem already baked in for the next next growing season and we are just fundamentally screwed?

And even if we were able to get straight up hormones completely open and everything fixed, we're not fixing it till the next growing season? How how do you think about how dire the situation is based on that timing?

So I will say, I think North America is in better shape than some other places around the world. And the reason being is exactly that. Right? Our spring season is when most of this stuff goes to the field. Now there is a fall run for phosphate potash and anhydrous, that nitrogen form we talked about that was dangerous.

There is something that goes on there, but there's a bigger cycle in the spring. And so a lot of the stuff that we needed for the spring cycle was either already here or en route. So I've been sitting there saying, I think we are in good shape. Not great shape. Great shape would be every single ton is already here and there's an export ban in place.

The tons cannot leave our country. That would be great shape. Unfortunately, with our price being where it is, we are seeing some exports happen that has me worried. But I think North America is gonna be in okay shape. But let's say we do all of a sudden decide we need more tons.

We need half 1000000 more tons of urea, for example. If that straight opens up right now and you have a boat that's empty, you have the products sitting at the dock in the Persian Gulf and they can get that boat docked, tied off, open, loaded, untied, closed, and shipped back out. It will still take another 30 days for that boat to arrive here. We're the April. May that stuff arrives.

It's just hitting our shores. Now it's gotta get into the marketplace. Now all of sudden you're talking a 2, 3, 4 week process. Now it's not arriving until the month of June. That's too late.

The crop is growing. It's not gonna do anything. So unfortunately to your point, we're kind of already stuck at where we are, right? It's if it opens today, it's gonna have minimal effect on the rest of our spring season. We're already baked in.

Where it can help is the rest of the world. We've been saying for a while we think North America is in good shape. We are worried about Australia. We're worried about Asia. We're worried about East Europe because they're just far enough behind on their buying patterns.

They got impacted by this more than we did. And frankly speaking, North America, financially speaking, is a little bit better shape. We can pay more for it. And people send stuff here just because we are The US. Those places hurt, and those places are very key for the wheat market.

That's my first tier problem. If this thing continues to drag on and the strait remains closed, then we've gotta start talking about South America, specifically Brazil.

Mhmm. Apologies for what is gonna sound like a callous question. Is that good for American farmers? Because 1 of the problems for American farmers is the cost of inputs and everything else is going up, and the price of the actual commodities has been going down. If if what you're talking about has already happened when it comes to Australia and Asia, etcetera, and if it starts to then maybe affect South America if this conflict goes on longer than the market is predicting right now, does that mean the American farmer is gonna get a high price for what they want?

Or should it is that is that a callous and also incorrect way of looking at it?

No. It it's a callous way of looking at it, but it's the right way of looking at it. Right now, the grain market, the reason it's not gone up is because there's plenty of stockpiles. There's plenty of supply out there. The market is basically trying to beg the farmer, don't plant the crop.

We don't need it. We have so much of it already. And it's begging for a weather event for farmers to pull back on their fertilizer, to pull back on the acres that they plant. Well, if the fertilizer market says, well, I don't exist, and that naturally occurs where the acres don't get planted or lower application rate, where the case may be, it's doing what the market's asking for. Now is it gonna skyrocket because of that?

There's an argument. There's already so many supplies out there that may not have the effect we hope for. But, yeah, ultimately, it's a win for The US farmer, especially if we have the tons that we need to get through the spring season. We can do everything normally.

Yeah. I wanna turn your your gaze to the rest of the world in a second, but the last thing I wanna ask you as we're focusing on The United States for a minute is don't if you saw American Farm Bureau had a really interesting survey that they published. I think it was this morning where it was looking at percentage of farmers who prebooked fertilizer. It's an imperfect survey, obviously. It's not perfect data.

But I it it stood out to me because you were looking at the Midwest Region, roughly 67% of respondents saying, yeah, we booked. We're good. And that's the corn and soybean belt. I looked at my Southeast, 19% had booked fertilizer. You're looking at, the West, 31%.

So do you think you know, if if North America is fine, are there pockets of North America that are not fine? Are there particular types of crops that as a result are going to suffer from that point of view? How do you think about that geographic distribution even within the place that you're optimistic?

We felt that the farmer was further behind on purchases. Just because when you look at the economics throughout this entire year, starting back in July 1, there's never been a sign for the farmer to get excited and say, yeah. This is great. I need to go ahead and lock this stuff in because I'm gonna make money. This is a great situation.

Get me locked in. That hasn't happened. And so the market has been dragging behind. I saw the same thing, and I struggle with it. When you start to look at some of the details of it, somebody on Twitter said it best, and they're like, had I taken the information they just shared that backs this survey, I think they said, what, 3,000 respondents and this and that.

Mhmm. And I had gone to my statistics professor and tried to put this in front of them as a grade, he would have given me an F. It said something to that effect. It basically saying the sample size was so small compared to the number of farmers that are out there, it's almost meaningless. I don't think it's meaningless.

I think it does show that there are a lot of farmers who are further behind, but I also don't think that your farmers who bought ahead are probably gonna waste their time responding to that. You know, it's kinda

to your point, it may all just it may also just be like a psychological indicator. It may just be that Midwesterners are more optimistic than everybody else in the country, so they said nicer things to

the Well, if somebody calls me up and says, hey, what's your yield look like out there? Well, if I want the market to go up, I'm not gonna sit there and say, man, it's bumper crop. It's gonna be fantastic this year. We're gonna make so much money. It's ridiculous.

It's a little tough. Oh, diseases come in. Oh, this is looking pretty my number's gonna look pretty poor. Well, how'd you raise? Oh, we we maximize.

This is the best yield we ever had, but I'm not gonna tell you that. So yeah, there's some gamesmanship. There's a lot of emotion in this marketplace. Again, I'm not sitting here saying that report was wrong. I think it actually points to a broader issue that there are more farmers who are further behind bought than what they normally would be, But I think we have to also take account with a a gray assault, if you will.

Yeah. You don't have to say that's wrong. I'm happy to say that this wrong based on what you said. I'm happy to discount its importance in my eyes a little bit more, but I don't have to be so diplomatic. Apologies to any Farm Bureau listeners who are listening, but that's you can send your hate mail to me.

I wish that they could have gotten more responses. And I understand why it's hard to get people to respond. It's hard to get that information put together. I don't have anything better. I'm not sitting here saying I have the data at the back and say it's right or wrong.

I'm I think it's directionally correct. I I think that's probably the best way to say it.

Well, yeah. And I mean, all data's imperfect. We like to think that we live in a world where you can just ask a question and your AI is gonna give you data. But as we all know, 79.4% of data is all made up. Let let's turn to the rest of the world for a second.

You already sort of alluded to it. Tell me some of the countries or crops that are most at risk as a result of this the disruption that's already happened, like, you know, leaving aside what is going to happen, how the war begins, like, just what has happened up to now. What countries and what crops are most under pressure as a result?

I would say the 1 we've been watching the most is wheat. And that's because I think Australia is further behind some of the vessel tracking that we've been doing. They have been dragging behind kind of their averages through this time of year. Now some of that's going be offset with the fact that it's stinking dry in the East. Their farmers are hurting bad from the stories that we're hearing over there.

So it may just be demand destruction. They just don't care. Our imports can be down. We're not gonna use it even if it was here. But I'm worried about the wheat market down there.

Same thing for, Eastern Europe. The wheat market, you start to look like Ukraine's and things like that. Again, I'm just not real confident because so many of those tons from the Middle East flow that direction to feed those farmers. I don't know that they were able to shift really, really quickly. I mean, you think about it.

There's a lot of production that's in the Asian market. Right? Well, the problem is China's not exporting. That's all of a sudden the supply void in that part of the world. So you can't turn east or turn west.

Well, the Middle East ain't there because they're not exporting. North Africa is getting soaked up by, like, Europe and other places. It just gets harder and all these dominoes start to fall because you're going to layer 1, layer 2, layer 3 of the supply side. And you're getting told, sorry. I got nothing.

Sorry. My prices sky high. And That's where I think those Eastern places probably hurting a little bit more.

Yeah. Okay. Well, let's sort of start to get a little more nerdy here by asking, you you called out wheat specifically. So if farmers both in North America and in the rest of the world are either don't have access to fertilizer or applying less or more spares or sparingly than before, what kind of long and short term impacts should we expect that to have on things like yield or even, like, quality, like the protein content in wheat or something like that? Like because it's not it's not a 0 fertilizer.

Right? If it was a 0 fertilizer, we'd all be running around with our with our heads on fire, but it's not as much. And for some parts of The US, it's, maybe better than others. So how should we think about that quality question?

Yeah, and I'm not gonna sit there and act like I'm an expert in this, right? I'm barely smart enough to keep up the fertilizer markets. That's probably a lot better question for like agronomists and things like that. But I will say, I've been asking that question. I've been trying to reach out to some folks that actually have the information.

The 1 thing that we get is that a lower fertilizer rate is going to have a big protein impact. It is going to be something that's going to be seen at harvest. The other side of it, it's gonna be less yield. Right? If you don't put on the nitrogen fertilizer to max a fit, you're not gonna get max yield.

And so there's gonna be a draw down that's there. Now some people across, The US, for example, are sitting there saying, I don't care. Look at the quality feedback we are getting from everybody out there. The wheat crop looks terrible. But again, the wheat market has not cared from a pricing perspective because it's saying we've got more than enough for the moment.

Now as it starts to see other countries start to pair that, you know, the rest of the world is starting to pair that, maybe now the market starts to wake up and it's like, oh, okay, we had a lot, but we're gonna chew all the way through that and then some. We've gotta start to switch this back around and maybe that will start to fix it. That's what the hope is. If we've got to go through this, and unfortunately there's no quick fix for the fertilizer side of the equation, there needs to be a fix on the grain side. And we need it sooner than later.

When

I've been talking to farmers about this and trying to get smart on fertilizer, and this might explain some of the lack of urgency in response to this. 1 of the sentences I kept hearing over and over and over again was fertilizer follows crop prices. That really what's gonna happen is that when crop prices go up, okay, then fertilizer, you know, companies are gonna raise prices and that it this is really demand driven rather than supply driven. So I'm I'm I know that I'm, like, teeing you up for a big softball, but then I also wanted to pick your historical brain and ask how many times have we actually seen supply driven price increases when it comes to fertilizer versus demand? You you you know, we've we've thrown around words like worst case scenario and and unprecedented, but are there any historical antecedents for us to look at over the last 50 years?

And and talk a little bit about that supply versus demand sort of question inside the farmer's mind.

Let's do it this way. There's been 4 super cycles in fertilizer. 2008, 2012, 2022, and the 1 we're living in right now. And the reason why the farmer is saying that is because they're right. In the past, fertilizer did follow grain.

2008. What happened in 2008 that made corn prices go up? It's the ethanol boom. All of a sudden ethanol was a thing. What did corn acres do?

It went from 78 to 90 plus million acres. Fertilizer demand skyrocketed and everybody started losing their mind. I need to buy product for the fall. Holy crap. It's out for the fall.

I need to buy product for next spring. I remember being still somewhat fresh in the market. I only had what 5, 6 years under my belt by that point. We were talking to customers about selling them the following fall. Not the 1 coming but the year after.

That's how nuts the market went. That worked well. The market skyrocketed in price. But the problem is we got to a point where the buyer just said, okay. I'm done.

I don't need anymore. And we looked around and there was still plenty of supply out there. And that's when the price fell. It was a demand driven thing and demand a bull market works as long as you feed it every day. The second you stop feeding it, it starves.

We got up here. We stopped feeding it. It starved. It fell out of bed just quick as it went up. Similar thing happened in 2012.

Demand shifted that thing sky high, and all of sudden, it fell out of bed. 2022 was the first time we had a true supply driven marketplace, and this is what we kept warning people. It's like, can't look to o 8. You can't look to '12. This is a different marketplace.

At the at the worst of it, we had lost most of European nitrogen production because they shut off Russian gas, and the Dutch ETF went from, $3 $4.05 dollars in MMBtu, it showed up to like a $103 at 1 point. We lost most of Europe. We thought we were losing Russia, but we never truly lost it and European production came back to about 75% normal, which is where it is today. That was a supply squeeze, and that has lasted longer. This is a supply squeeze that we have never seen before.

This mirrors 2002 far more than 2008 and 2012. So have we seen this before? Yes. To a lesser extent in '22. We've seen it once in our lifetime.

And '22 was fairly short lived, I would say. Like, a lot of the concerns didn't really materialize and the supply chains were able to open up, which is easier, just as a result of the geography of that conflict. It's much, much harder when you're thinking about it. You gotta get stuff out through the Strait Of Hormuz. Well, how do you think international markets are gonna adjust to this?

Because to every action, there's an equal and opposite reaction. And you you talked about how maybe this was a wake up call for markets. So do we go back to an old normal if there is some kind of ceasefire mechanism, if there's a toll on the Strait Of Hormuz or whatever happens, or is this going to cause a fundamental shift? Are we gonna be here 8 years from now talking about how this was the fourth super cycle and we produced too much and then prices completely collapsed because we produced too much?

I hope that's the case. From a farmer's perspective, I grew up on a farm family in Northwestern Zurich. Got a lot of friends and family that still farm. I hope that's the situation. I hope that we come out of this thing and everybody in the world increases their production and all of a sudden we get to an oversupply situation.

In oversupply situation, there's not a lot of price volatility. You don't see a lot of, you know, big peaks and low valleys. It's steady. I'd love to get back to that. I don't think that's reality.

Unfortunately, when you start to look around the world, you're just not seeing the projects be discussed yet. I think we need to play a big part of it. India is partnering with Russia to build a new production facility. I know like there's a facility in Nigeria that same company has talked about and build another 1. So there's a few of these out there, but the unfortunate part is demand continues to grow every single year.

We've gotta get ahead of this cycle.

I hear your hopes, but it's I mean, let me put spot a little bit there and say, so, like, 4 years from now, are you saying based on the level of political and policy and investor reaction to what's been happening that we will have another supply crunch, that something will have to be worse order to move markets in a meaningful way?

I don't think we can make it worse than what it is today. I I better not say that. The second I say that, the market's gonna make me look stupid.

Oh, it's

It would be very fine.

It's but people will click on the podcast because they said it's so funny.

It can't get worse than today. I I honestly, I think to make this thing worse, the thing we've been telling folks is it would take removing Russian exports from the marketplace. They're like the single biggest ones still out there. And if all a sudden we lose them, it's just it's gonna expose this thing in a way that doesn't even seem imaginable. I am hoping with the attention that's getting let's face it.

You go to Washington DC 2 years ago, probably 5 to 10% of politicians knew what fertilizer was and what it did. For everybody else, it was a foreign word. Now everybody is talking about it. It's getting its 15 minutes of fame. Every politician is talking about it in 1 form or another.

And I'm hoping against hope that that means there's gonna be more conversations. And, again, this me is me assuming Washington DC actually works. It doesn't right now. That freaking center line between the right and the left might as well be the DMZ zone. Right?

It's you don't cross it. You don't work together to get anything done anymore. Stuff like this, we gotta drop all the stuff to the side, and they've gotta have a conversation and fix it. I'm not saying we need to be completely self sufficient, but I don't know that we need to be dependent on 5 plus million tons either.

Yeah. I mean, ideology is a circle. So eventually, you go far enough in either direction, you will meet each you will meet in a new demilitarized zone. But it does seem like both sides are pretty far down the road before the turn or before the bend in the circle. And, you know, for those who are hoping for lower prices, you should hope that the Ukrainians are not listening to this podcast, although they probably know that.

Because if Russia is the big thing and if they are watching Iran develop strategic leverage as a result of what they've done in Hormuz, and they have not been able to get the EU to agree to fast track a session or get The US to agree to support them in the war in general, if that is that big of a choke point, like, it's something that the Ukrainians could hit if they wanted to play some cards to steal some verbiage from the president. But that leads to another question I wanted to ask you about. You've already sort of answered it, but are there other global pinch points for fertilizer that we should worry about, that we should be watching for conflicts in those zones or weather in those zones? Like, what are other pinch points in the world that if we saw those, we saw some kind of restriction on those that we would have to say, oh my god. And if you layer this on what's going on with the Strait Of Hormuz, we're really in trouble.

It's Russia. If we see a situation where Russia starts to slow down or stop exports completely, and that can be in the form of the Russian government want to wanting to inflict maximum pain on the rest of the world. That can be Ukraine striking nitrogen production facilities, which unfortunately they have been doing. Now they are striking facilities that are key on producing ammonium nitrate. Ammonium nitrate blows up.

It's an explosive. They're So using it in the war effort, and they're trying to stop that production. But it also takes out stuff like UAA and urea anhydrous, so if they strike even more facilities. If Ukraine sits there and says, we've basically been in a military stalemate, we don't think we can push them back out of our lands given the support that we're seeing from around the world, but I can't bankrupt them. If I go and I attack every single 1 of their export facilities and I blow it up and make it inoperable, the Russian economy works on natural resource exports.

That's their key thing. So if I blow up those ports to the point they can't use them, I stop their income flow. They can't pay for this war anymore. They're forced to get out of it just because they've got no cash left. So to me, Russia is the thing that makes this thing that's already horribly, terribly sit up, and it takes it to a whole new layer.

This it would make this look like child's play.

And just not to scare the listeners too much, Ukrainians also need fertilizer, and they're a big producer. And, probably they're getting a lot of their fertilizer from Russia too. So there's a certain level of mutually agreed destruction there. But that, I think, is 1 of the biggest risks to talk about in general. We talked about the big 3, nitrogen, phosphorus, potash.

How important are the supply chains for other nutrients? Because, you know, we're hearing about sulfur really in the context of, of copper. But, you know, if you're thinking about boron or sulfur or calcium, some of these other things, which are important inputs for The US farmer, they're not the big 3. Are you worried about those 2? Are you seeing that affect that?

I know they're lesser talked about and I always like the underdogs, so I wanted to at least pick your brain about

them. Sulfur would be the 1 outside the big 3 that I'm most worried about. And again, I'm not an expert. I don't want anybody listening to me and thinking, this guy's great on sulfur. I pair it with smart people say and I Google a lot of stuff and I hope that's right.

1 of the things we looked at was how much sulfur comes from the Persian Gulf. According to handy dandy Google, half of the world's tradable sulfur supply comes from The Gulf. Why is that important? Well, number 1, sulfur is 1 of the fertilizers that you go in and that demand has continually raised over the years. Number 1, because we cleaned up the environment.

It used to be you got a certain amount of sulfur that came from acid rain. Well, 1 of the good things is we clean up the environment. 1 of bad thing is far demand for sulfur has gone up to replace that. Number 2, we continue to get better and better at raising this crop. The bigger the crop is, the more nutrient pulls out of the soil that you have to replace to raise that big crop again the next cycle.

So sulfur has been a bigger thing and sulfur was already a market that was incredibly tight and incredibly bullish before any of this stuff happened over the last 8 weeks. And then all of sudden, they shut down straight Hormuz with all those refineries and everything else that as I've been explaining, it's coming from all the refineries. Half the world's supply is also just gone. And those prices are just asinine.

When we're talking about The US farmer, at at what point and maybe we're already at this point. Does it make sense for a conventional farmer to think about using organic sources, you know, chicken manure or something like that, if they can get their hands on it versus trying to go through their normal supplier relationships or dealing with rising input prices? Is that a dynamic that you're seeing? Do you think it's 1 that might increase? Because, to our point earlier, neither 1 of us have $4,000,000,000 in our back pocket.

But I'm sure there are folks out there who could spin up organic fertilizer for a price that is starting to look competitive to what you would have normally gotten on a supply basis?

The problem yes. The answer is yes. And I think there's a lot of high priced stuff, a lot of scary new technology, a lot of things that were put up on the shelf and said this doesn't work, it's gathered dust. And we've been telling people, take that stuff off the shelf, dust it off, look at it through fresh eyes because the market is so much different than today. It is asking you to try to consider some of these other things out there, other approaches, other opportunities.

And I will say this tongue in cheek, there's only so much crap to go around. You know, if you think about it, we've only got so many cattle. We've only got so much chicken. We only have so much manure out there for all the demand. So can you look at that and maybe help make a little bit of a difference on your farm?

Maybe the problem is everybody else is doing the same thing. It's a very finite fertilizer, and that's the unfortunate part of it. We haven't really changed the amount that's out there, so it can't change the demand that's out there. If it's an option that hasn't been before, something you haven't looked at and it's still available, absolutely, take a look at it. But, unfortunately, when you look at it, it's it's a very, very small mover for the overall marketplace.

Yeah. It's a hope springs eternal story because you might hope that 1 of the market reactions to this would be, look, if the big 3, if we're gonna have trouble with access to them or if we're gonna have future supply side crunches or things like that, what the we we waste 40% of the food that is grown in The United States and in the world, like, surely, there is some way that you could try to use that waste and reformulate it into things that might help the fertilizer question. Maybe it doesn't solve you on a 1 to 1 basis, but could you take 15% of your need? Could you take 10% of your need? Like, even then, that would be helpful.

But, you know, that's probably a longer term story and maybe even a little bit too a little bit too helpful.

Well, think it's something to be helpful for though. Right? I mean, we always talk about these things like, it's a small percentage. Well, small percentages of really really big numbers are still really big numbers. It's it's never the massive percentage change that makes the massive difference.

It's always that last 5, that last 10% that really pushes and pulls these things. So little things like that, yeah, I think it's something that needs to be talked about. We've got to start figuring out how to change these practices whether it's from a production side, whether it's from a demand side. Right now, the market's begging us to do something different.

Yeah. I mean, that that's a real I mean, I've been actually talking about that for farmers from a geopolitical and a trade perspective. So I love your point because you're under now I can go back to farmers when I'm speaking to them and be like, You know how I told you that global agriculture has completely changed? The fertilizer guy says it's changed too. And he says if you keep, using fertilizer, like, it's 2022, you're gonna be up the creek without a paddle, as my father used to say.

1 last really nerdy question and then I'll ask you to sort of take a step back, for our last 1. How would you go about and this is a question that I got from a listener who I told I was talking to, and he was excited to get the the question. But he asked, how would you value carbon in a fertilizer? Is there a formula that you might use to derive value? Is there no value whatsoever?

Is this something that might shape markets going forward? It's it's got a couple layers there, but cook on that however you like.

I'm not again, that's another 1 of those topics you get into I'm not real strong in. Simply because the average American farmer, if you sit there and ask them what their approach is and what stuff, they're gonna laugh at you. It's just it's really not a part of conversation. Some of the new nitrogen production, right, is centered around this green energy and carbon footprint and all this other stuff. And some of these projects, the owners have been like, oh, well, the farmer will pay more for it.

Do you know how hard it is not to laugh at somebody in their face when they say the average American farmer will spend a premium on their fertilizer if it's produced using green energy? It's very, very Yes.

I do. From personal experience, I I learned that 1 the hard 1.

So, I mean, it's could this be a thing? Yeah. If the government forces it, it absolutely can be a thing. But I don't think that's gonna be something that's a big part of it if it has to happen naturally. I think it had to a government mandated type thing.

And right now, with the administration as it is, that doesn't look likely. It also doesn't look like it's real good news for the Republicans on the midterms. This thing could cycle right back real quick, and it's a bigger part of the conversation. So therein lies that whole 2 to 4 year flip flop back and forth. You never quite know what to expect.

Well, it's also I mean, to your point, I mean, you know, we we want the government to intervene in some areas, not intervene in other areas. Europe has really led, I would say, on carbon pricing, but European farmers are rightfully pissed off about the lack of value that the EU has placed on the things that they do and and their, demonization. Okay. I gotta get you out of here. So last question is really just to serve it up to you.

If you want listeners who are not following Fertilizer Every Day, what's the 1 thing they should keep in mind as they are trying to think about this conflict, whether it ends tomorrow or whether it ends 3 weeks from now? What's the most important thing they should be watching to understand the consequences and impact of what we talked about going forward?

I think number 1, you've gotta take it seriously. And I understand. The average farmer has had so much snake oil, so much sky is falling. They have had so many nightmare scenario thrown at them that it just never came true. You know, it it's everybody lives a crisis so many times in their life, but nothing ever actually comes of it.

We worry about events more than they actually happen. This one's real, and it doesn't mean you're not gonna have the product. It just means this is a very, very real situation. You need to keep it in back of the mind. We are part of a world economy whether we like it or not.

These world events absolutely matter here at home. That's the biggest thing. The second biggest thing is you have to talk to your supplier. And I don't care what that supplier looks like. I don't care if it's independent, retailer, co op.

You need to have a conversation. Our natural inclination is when times get tough, we stick our head in the sand and say it's gotta be better later on. If I just ignore it long enough, it'll be better. If you ignore this right now and you show up to that retailer and say, hey. It's May 1.

I want my side dress urea. They may sit there and say, I don't have it. I'm not gonna take the risk on it. I know what the price is. I remember 2,008 and 12 and 2022.

I'm not gonna be on the wrong side either. I'll do the best I can to find it, but I don't have it. Whereas if we have the conversation today, you may be like, hey, I know Linville's gonna need this product. I feel comfortable buying it. I'm gonna get get my hands on it.

We've gotta have more conversations. This whole just in time demand thing in this type of environment, I'm not gonna say guarantees you're not gonna find product. I'm not gonna be that sensational even though it might help with the clicks, but it's much healthier for the supply chain to have better communication to say, hey, here's my expectation, here's what my demand, here's my timing. That way the market can prepare for that. Just coming in day 1 and saying, need it right now.

That's not gonna work in this environment. I hope it does. I wanna be wrong. But I think we need to have these conversations sooner than later.

Yeah. Everybody has a plan until they get punched in the mouth.

That's right. Mike Yeah.

That's I mean, the greatest geopolitical analyst I've ever done. Josh, thank you so much for coming on, and I hope that you'll come back. And I hope that the next time you come on, we're talking about the huge overproduction of of fertilizer that we see because people listen to this episode who had $4,000,000,000, and they were like, yeah, we wanna put that capital to work. And if you have the 4,000,000,000, why don't you write to me? I'd love to be part of the endeavor.

Cheers. Thank you for listening to the Jacob Shapiro podcast. If you enjoyed today's conversation, you can find more episodes, essays, a link to our substack, and tons more analysis at jacobshapiro.com. And if you ever want to reach out directly with questions, feedback, guest ideas, if you want to inquire about booking me for an event or any of my consulting services, you can email me at jacob@jacobshapiro.com. Also, if you found this episode valuable or interesting, please consider subscribing, leaving a review or a rating, or sharing it with someone you think might appreciate it.

Take good care of the people that you love. Cheers, and we will see you out there.

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