Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
China, Anhydrous and the Open Veins of Latin America
Jul 26, 2013
In 2009, President Obama visited Trinidad and Tobago for the fifth Summit of the Americas in an effort to improve relations between North and South America and island nations in the Caribbean. This was the first time the President came face to face with Venezuela's Hugo Chavez and other dignitaries from the region. Chavez reportedly gave Obama a copy of Eduardo Galeano's 1973 book, 'Open Veins of Latin America: Five Centuries of the Pillage of a Continent'. The symbolic gesture speaks volumes and the ideals expressed in that book live on beyond the March 2013 death of Chavez, and Chavez loyalists have vowed to keep up the fight.
'Open Veins of Latin America' was a contentious work that outlined the exploitation of the citizens and resources of Latin America first at the hands of European colonizers, and then by U.S. Imperialism. But the governments of Brazil, Chile, Argentina and even the author's home of Uruguay all banned the book for its left leaning rhetoric. This is a one-sided work born of economic frustration, and anti-capitalist sentiment.
Trinidad & Tobago lies just 11 kilometers off the Venezuelan coast and is the leading supplier to the United States of ammonia. Relations between Trinidad and the U.S. are in good shape, and American agriculture has given Trinidad a solid revenue stream based on abundant natural gas reserves. But these reserves are currently threatened. A Monitor article from yesterday reports the two largest natgas refineries in Trinidad & Tobago shut down in 2012 due to declining reserves.
Meanwhile, China has made gains in LNG infrastructure and is now seeking consistent producers to fill its LNG dancecard. Among its first stops -- Trinidad and Tobago. With two Trinidad plants shutting down last year, ammonia production capacity was reduced by nearly 40%. If Chinese interests lock in part of the Trinidad natgas supply, prices for U.S. bound anhydrous ammonia could easily skyrocket as ammonia and LNG would be in direct competition for natural gas.
Maybe we are fear mongering here. The Chinese have too much to gain by collaboration with the United States, and as the middle class there and in other parts of developing Asia grows, U.S. crops will feed the cows, hogs and chickens that will provide the protein for this burgeoning demographic. On the manufacturing side, China and the U.S. share a symbiotic relationship as China provides low cost goods to American consumers at an affordable price. But this is a tenuous friendship born of convenience, not mutual admiration.
I was talking with a farmer the other day and as we rounded our 2nd adult beverages, he threw out the question, "do you think China will ever invade us and try and take over?" My answer was, "profanity, no!" China cannot grow corn like we do. They need our corn more than they need victory.
If Trinidad and Tobago share the sentiments of the still influential Chavez regime -- just 11 short kilometers away -- they will likely find sympathetic company in the Chinese. However, each of those nations has a need for a strong American consumer. If the citizens of the U.S. stopped buying Chinese socks and doohickies at Wal-Mart, that country could face some real economic peril. But if anhydrous prices itself off the farm as a result of increased LNG sendouts from Trinidad, U.S. total yields would suffer making export commodities expensive on China's end.
In the event that anhydrous ammonia becomes scarce, U.S. anhydrous users would be forced to switch to urea and the ensuing transition and learning curve could limit yields in the U.S. for a few seasons. Remember, China has been cranking out urea over the last two years as fast as they can make it, and more production capacity will come online in China in the coming months. Could it be the Chinese are lining up to corner natgas, stifling ammonia out of Trinidad so they can sell American farmers urea? It would not be the first time China jockeyed with fertilizer pricing based on tenders -- recall the potash holdouts of 2012 that led to strong declines in potash pricing and left Saskatchewan in a crippling oversupply.
Anti-American sentiment has a strong foothold in Venezuela, and with leaders in the region still touting economic exploitation in Latin America, Trinidad and Tobago may look to China as a way to continue to profit from natural gas and a means to make nice with Venezuela, all the while claiming the title of the tiny nation that beat American imperialism single-handedly and finally settled the score -- if only Chavez were around to see it.
I believe Trinidad and Tobago would prefer to keep supplying ammonia to the United States. But Latin American nationalism and Chinese import demand for LNG coupled with supply constraints and declining proven natgas reserves in Trinidad could produce a witch's brew of high prices and ammonia shortages. The need for domestic nitrogen production is becoming more evident by the day. Production capacity increases will be coming online in the Midwest over the course of the next 4-5 years -- the more the merrier.
Nitrogen demand in the United States will be strong in the coming season, as it has been in seasons before. Domestic nitrogen production is on its way to save the day, but the question remains if it will arrive in time to shelter growers from price spikes and ammonia shortages out of Trinidad.
Meanwhile, as our President continues to acknowledge the woes of the downtrodden socialist world, the American ag industry must insulate itself against global forces that would settle old scores and reopen old wounds.