Keep Calm and Listen to Your Inside Voice: Fertilizer Markets at Work

Key Points

• From late 2020 through mid-2022, prices for nitrogen, phosphorous, and potash fertilizers more than doubled for several reasons, some of which were a direct result of Russia’s invasion of Ukraine and others partly associated with COVID-19 supply-chain disruptions.
• Beginning in mid-to-late 2022, fertilizer prices have been falling as COVID-19-related supply disruptions have moderated, agricultural commodity prices have fallen, and prices for natural gas, a key input for nitrogen fertilizers, have dropped sharply. This trend seems likely to continue in 2023.
• US policymakers can also affect fertilizer prices by further reducing tariffs and trade restrictions on fertilizer imports, thereby increasing incentives for farmers to increase yields, crop production, and farm incomes.

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Introduction

When the US inflation rate is relatively high, as has been the case over the past 15 months, many media commenters tend to opine that the price of any commodity can only go higher, never lower. In fact, the definition of inflation is a general rise in the overall cost of a “basket” of goods and services that consumers typically purchase. Thus, even during a period of inflation, markets and prices for individual products or services can behave differently from one another.

For example, over the past nine months, prices for the three major forms of fertilizer—nitrogen, phosphate, and potash—have vividly demonstrated that what has gone up can come down, if there is sufficient competition between firms and if government attempts to “manage” markets are kept at bay. Recently, we examined the causes of the rapid rise in fertilizer prices that occurred in 2021 and throughout much of 2022.¹ Since then, however, those prices have begun to decline, an outcome entirely consistent with well-functioning markets in which both supply and demand conditions have changed.

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Notes

1. Gary W. Brester and Vincent H. Smith, “High Fertilizer Prices: Supply and Demand at Work Muddled by War and Market Interventions,” American Enterprise Institute, May 2, 2022, https://www.aei.org/research-products/report/high-fertilizer-prices-supply-and-demand-at-work-muddled-by-war-and-market-interventions.