Having grown up in a farming community, then working in agriculture for more than 25 years, I have witnessed the exceptional resiliency of North American farmers many times.
After 2019, I thought I had seen our industry overcome among the most significant challenges we would ever face: Historic flooding in the spring that disrupted fertilizer applications and planting followed by poor weather in the fall that disrupted the harvest.
As we all know, the agriculture community faced even more challenges in 2020. The COVID-19 pandemic created extreme uncertainty across the economy, including for key crop consuming industries such as ethanol and animal feed. Despite this unprecedented challenge, North American farmers did what they always do: Efficiently and responsibly plant and harvest the world’s best farmland, ensuring our food supply was not disrupted. As one of the key suppliers of nitrogen fertilizer in the region, we were proud to do our part to ensure the agricultural supply chain worked as it should.
The uncertainty that farmers faced affected our outlook early in 2020 as well, particularly for industrial uses of our products. Nevertheless, the global nitrogen market proved resilient. Demand for agricultural applications grew in 2020, and industrial demand continued to recover from the disruptions in April and May.
As we look ahead to 2021, we expect that the key factors driving the global nitrogen market in the past few years will remain the same: Demand in North America, India, and Brazil and global energy prices, particularly anthracite coal prices in China. What is different from 2020 is the context in which these dynamics will play out, particularly improved farm economics in North America and higher energy prices in Europe and Asia. We believe that these developments will support a firm outlook for the global market in at least the first half of the 2021 as nitrogen products continue to provide farmers with tremendous value relative to their cash costs.
Improving Farm Economics in North America Expected to Drive Nitrogen Demand
The most positive development to come out of the challenging year the agriculture industry has faced is the financial position of crop producers in North America. Cash receipts for crops in 2020 in the U.S. are expected to be at their highest since 2014. As I write this, near-term crop prices for many crops are at their highest levels in several years.
Profitable futures crop prices for nitrogen-consuming coarse grains suggest a positive outlook into 2021. CF Industries projects in excess of 90 million planted corn acres in the U.S. in 2021, in line with levels of the last 10 years. Plantings will be supported by corn futures prices, which have increased approximately 30% since the end of July on lower expected 2020 corn supplies, strong feed and export demand, and recovering ethanol production.
We also project increased canola plantings in Canada. Last year, Canadian farmers had the lowest canola harvest since 2015. These low production levels and current high futures prices will provide support for an increase in canola plantings in 2021.
As a result, we project a stable level of nitrogen demand in North America in 2021.
Global Demand Remains Strong
Outside of North America, we continue to expect positive demand for nitrogen in most growing regions, particularly India and South America. India and South America (led by Brazil) are the largest urea-importing regions in the world. Each imports more urea than North America.
India’s tender process, where government entities request bids for large quantities of urea a limited number of times per year, will ensure that India’s role in global urea prices remains outsized. When India is purchasing, global prices tend to be higher. When the country is not, suppliers to India have to find different outlets for their product, which typically causes prices to drop. Favorable weather in India has supported record urea tender volumes in 2019 and 2020. We project urea tender volumes in 2021 to ease from record highs, but to be above the five year average of 6.5 million to 7 million metric tons.
Brazil, in contrast, will import nitrogen throughout the year to meet demand in its fertilizer application season much like North America. We believe that improved farm incomes and the lack of active domestic urea production in Brazil will continue to support demand for approximately 6.5 million metric tons of urea imports in 2021.
Keep an Eye on Global Energy Prices
Energy — whether natural gas or coal — is the largest input cost in nitrogen manufacturing. Our company annually publishes a global nitrogen cost curve, which uses energy price forecasts for natural gas, liquefied natural gas and coal for the following year. What the cost curve shows is that Chinese complexes that rely on anthracite coal for feedstock have historically for many years been the highest-cost production in the world. As a result, they serve as the global marginal urea producer and set the global price. The shape of the rest of the curve, and thus projected margins for other nitrogen producers, are largely driven by differences in the cost of energy sources.
We saw an unprecedented situation in 2020 develop for the cost curve because of the pandemic’s economic disruptions. Global energy prices outside of Chinese anthracite coal converged. In fact, at points early in the pandemic, the cost of natural gas at Henry Hub, which is the benchmark price in the U.S., was higher than in Europe, something which had not occurred in decades. This led to a largely flat global cost curve. Formerly high-cost producers pursued this temporary margin opportunity available to them, increasing operating rates and pressuring product prices.
In recent months, energy prices have risen across the globe, but at a much higher rate in Europe and Asia than in North America. These higher gas costs, and the steeper global cost curve that results, will likely pressure margins of higher-cost producers in Europe and Asia, and potentially reduce global nitrogen production from these higher cost regions compared to 2020.
Nutrient Stewardship, Addressing Climate Change
Last year in this article, I talked about one of the long-term themes gaining importance in our industry and across the world: soil health and nutrient stewardship.
We are nearing the completion of the fifth year of our partnership with The Nature Conservancy on the 4R Plus program in Iowa. This program is designed to increase awareness and understanding among Iowa’s farmers and crop advisors of 4R nutrient stewardship (applying the right nutrient source at the right rate, right time, and right place) and in-field and edge-of-field conservation practices to help keep nutrients in fields and out of adjacent water bodies.
We expect the focus on using practices such as these to improve soil health and water quality will only increase in the years ahead, as will the emphasis on addressing agriculture’s impact on climate change. While we believe that addressing these challenges is an imperative, we also believe it will present an opportunity for farmers in the years ahead. A number of companies are looking at helping farmers to monetize carbon sequestration into the soil and thus create a new revenue stream.
At CF Industries, we announced plans in 2020 that will put us on a path to produce green (no-carbon) ammonia as well as low-carbon ammonia, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects. Since this announcement, we have been approached by several companies looking at monetizing carbon sequestration to see how a lower-carbon nitrogen product may support their efforts. These are exciting developments in our industry with great potential in the years ahead for crop producers.
I began this article talking about the unprecedented challenges farmers have faced in the last two years. We hope that 2021 is as normal a year as possible as the pandemic comes under control.
However, it goes without saying that it is extremely difficult to plan for or predict the types of events we experienced in 2019 and 2020. And while the agricultural industry is largely optimistic about the year ahead given many of the factors I have discussed, we do not yet know what will arise in 2021. What I do know is that crop producers, along with the entire agricultural supply chain, will continue to be resilient as we work together to overcome whatever challenges may come.