Fertilizer outlook – Spring 2011

FERTILIZER DEMAND EXPECTED TO INCREASE

grain market fundamentals will continue to be the main driver for fertilizer price activity between now and the spring, but government food policy shifts in developing economies are expected to have the largest influence on prices over the longer term.

As a result of forecasted low grain ending stocks later this year, it is expected that the US farmer could plant more than 90 million acres of corn a few months from now.  The last time this happened was in 2007 when an estimated 93.6 million acres were put in the ground, and fertilizer markets went on a major bull run that lasted until the crill limited the potential for price decreases before spring.  Meanwhile, purchase activity is ramping up across the Southern Hemisphere, with buyers in Brazil, India and China looking to position significant tonnage through the first half of 2011.

impact of developing economies
These regions of the globe cannot be ignored and have a major influence on fertilizer price activity.  Developing economies account for roughly two-thirds of fertilizer consumption annually and are expected to grow significantly over the foreseeable future.  Farmers in India and China have historically used less fertilizer per acre in their crop production, while using proportionately more nitrogen in their blends than their counterparts in Europe and North America.  Yield results are below standard and farmers there are now focused on doing a better job of balancing their nutrient programs to improve grain production.  This shifting focus will continue to increase demand pressure for phosphate and potash for many years to come.

Meanwhile, government policy in these countries also has a direct and material impact on fertilizer pricing in the rest of the world.  Providing food price stability for consumers is a core objective for developing economies as they try to avoid excessive domestic inflation.  India – which is the largest net importer of all fertilizer products globally – uses a major portion of their annual budget to subsidize the prices that their farmers pay for N, P, & K inputs.  And although China is traditionally a huge supplier of Urea and Phosphate to the rest of the world, they do not hesitate to implement high export tariffs to ensure that local supply of fertilizer is sufficient and prices are kept in check.  Global fertilizer prices can be subject to sudden and significant movement as either country changes their central policy.

supply considerations
On the production side, there continue to be new projects announced that should help the industry to meet growing demand for fertilizer.  Potash producers are investing to increase output from existing mines and the feasibility of developing additional tracts of land continues to be evaluated.  The Ma’aden phosphate mine in Saudi Arabia is expected to come on stream in late 2011 and new natural gas extraction technology is ensuring relatively low-cost supply to nitrogen producers. 

As welcome as these supply additions are, they do not necessarily match up neatly with changes in demand cycles.  It takes roughly five to seven years and billions of dollars to start a new potash or phosphate mine and establishing a new nitrogen facility is not much quicker or less capital intensive.  Likewise, greater focus is being placed on the environmental impact of fertilizer production, so companies that wish to invest in this space are faced with tougher standards.  As an example, litigation at the South Fort Meade mine in Florida has been keeping roughly one million tonnes of new phosphate production off the market.  At this point, it would appear that trend line demand is expected to slightly outpace additional supply over the next two to three years.

volatile prices
For the next few months, fertilizer prices will continue to be heavily influenced by the same underlying fundamentals that are driving the grain market.  It is not uncommon to see a 15 to 20 percent change in fertilizer demand as grain prices rise and fall.  Consider the logistical impact of such moves across a broad geography like North America.  In an environment where many dealers are hesitant to hold large volumes of unsold inventory, it leaves fertilizer consumers vulnerable to supply and price unpredictability.  To avoid the pitfalls of a volatile fertilizer market, the best strategy continues to be one where end-users and their suppliers work closely together to position the product that is needed to keep Ontario farmers competitive. •

About the author
Casper Kaastra is the Purchasing Manager for Agronomy Company of Canada and President of Agromart Terminals Inc.  He was raised on a dairy farm near Aylmer and has spent the last 15 years working in the fertilizer industry.

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