How is the ceasefire impacting wheat and fertiliser markets?

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Openfield experts provide an update on how geopolitical tensions are impacting UK wheat markets and fertiliser trade.

What a difference a word makes in the grain trade namely ‘Ceasefire’. Albeit only temporary and at the timing of writing, for two weeks which was immediately met with scepticism. We have seen the UK wheat markets, since the US and Israel initiated the campaign on Iran via ‘Epic Fury’ and ‘Roaring Lion’ on Feb 28, increase c.+£10 on the London derivatives for both old and new crop, as the markets sought to price in war risk. Brent crude increased from c$68 a barrel to a high of c$120 only to be trading at the time of writing back to c$95 a barrel a drop of c.15% on the day. As a result, we have seen the UK London wheat markets drop c.£5 from the highs.
The wheat market is relatively balanced at present, with seemingly comfortable global supplies weighing on the market. An increasing number of risks, however, are evolving preventing any sustained downside. Old crop has suffered from bearish overtones. Large global stocks and strong export competition from key origins have managed to weigh on the market, buyers are seemingly well covered and have been in no rush to extend cover which has kept the market rangebound for most of the season.

The downside risk however, is limited by several supportive influences. Most importantly, the obvious geopolitical tensions contributing to higher energy, logistics and fertiliser costs, which in turn underpin prices and add volatility. Weather concerns in major producing regions, particularly in parts of the US, have introduced some uncertainty. As a result, the old crop market has been trading within a relatively narrow range, reacting more to external developments than to any immediate supply pressures. Looking ahead to new crop, the outlook is finely balanced with a slightly more supportive undertone. While early expectations suggest reasonable production prospects in some regions, there are concerns that global output could ease. Lower planted areas, particularly in the US, combined with higher input costs namely fuel and fert, may limit both acreage and yield potential. Weather remains a key uncertainty at this stage. In summary, the current fundamental supply situation has managed to prevent any major friendly outlook, but the market is gradually evolving. Attention is now shifting towards new crop and any potential risks (weather, plantings and yield), leaving prices increasingly sensitive to any disruption, particularly on the supply side. In the current environment, the only thing that is certain is that volatility is to remain and that will bring both opportunities and threats.

Fertiliser matters

Ongoing geopolitical tensions have continued to disrupt global fertiliser markets, resulting in higher prices across all commodities as availability tightens. A particular focus has been on the Strait of Hormuz, a critical chokepoint for global fertiliser trade. An estimated 30% of global urea exports, 50% of sulphur, 20% of phosphates, and 20% of ammonia transit through this region, making any disruption highly consequential for global supply chains. At the time of writing, a conditional two-week ceasefire has been agreed between the US and Iran, during which shipping traffic will be allowed through the Strait. During March and into April shipments of fertiliser have been reduced by 98%. Even though a ceasefire has been agreed, reports suggest it could take several weeks to clear the existing backlog and resume normal trade flows if security, insurance and rules are stabilised. There are currently 22 loaded urea vessels that have been waiting for safe passage.

It appears the outlook on pricing is set to remain firm, although an end to the conflict would likely result in some softening, there has been significant damage to energy infrastructure in the Middle East that could delay the restart of fertiliser production facilities for several weeks. In addition, China who last year were the world’s second largest exporter of urea, have issued and export ban until August this year to protect domestic supply and pricing. Also, India who are the world’s second largest producer of urea, have curtailed production down to 50-60% of normal, due to being unable to receive usual LNG supplies from the Middle East. They have now come to the market for a urea tender requiring 2.5million tonnes to be imported by June adding further tightness to supply.

There are also restrictions in the ammonium nitrate market as Russia halts exports of AN to ensure sufficient supply during their spring planting season. Russian ammonium nitrate plants have recently been attacked by Ukrainian drones in an attempt to reduce production of explosives. Looking ahead, once peak seasonal demand has passed, some relief may begin to emerge. As energy supplies stabilise and manufacturers progressively restart production, this could provide an opportunity for some price softening later in the season.