Nutrients On The Rise

Even the most grizzled veterans of the crop input industry will admit that they have never seen anything like the developments in grain and crop nutrient markets during the last 12 months. For example, current spot prices of anhydrous ammonia, diammonium phosphate (DAP) and muriate of potash at Midwest US wholesale terminals have increased about 75%, 200% and 160%, respectively, since January 2007.

There are few signs of any let up so far this year, but forecasting from these levels should qualify as hazardous duty. A few trends are clear, however, and many of the fundamental factors that combined to pull or push prices up last year look like they will remain intact or potentially intensify this year.

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Demand Also Rises

First, crop nutrient demand prospects worldwide remain extremely positive due to record prices for a wide array of agricultural commodities. The pace of nutrient demand growth has more than doubled. The latest estimates from the International Fertilizer Industry Association (IFA) indicate that world nutrient use will increase 13% or about 20 million tonnes during the three year period from 2006 through 2008. That is a compound annual growth rate of 4% and it is more than double the rate of 1.8% from 1995 to 2005. The 20-million-tonne increase in global nutrient use is roughly the equivalent of adding another United States to world demand in just three years.

The positive demand outlook reflects the continued strength of grain and oilseed prices and outstanding farm economics in most regions of the world. At the end of February, the 2008 new crop prices for corn, soybeans and hard red winter wheat were trading at roughly $5.65, $14.25 and $11 per bushel, respectively.

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But it’s not just a corn-soybean-wheat game. The nearby contract for rough rice on the Chicago Board of Trade was trading at a record level of about $17.30 per cwt and the nearby contract for palm oil on the Kuala Lumpur exchange was trading at a record high of about 3,825 ringgits per tonne or 54 cents per pound at the end of February.

Markets are asking farmers around the globe to step on the accelerator and rev up the powerful engines of production agriculture in order to meet faster growth in grain and oilseed demand. That, in turn, is speeding up nutrient demand growth worldwide.

We estimate that US nutrient use during the fertilizer year that ended on June 30, 2007 increased about 10% due to the shift in acreage from soybeans to corn as well as moderate increases in application rates on most crops last year. We project that US nutrient use in 2007/08 will remain about flat at this high level as a result of a shift back to soybeans and steady application rates. Nitrogen use is expected to drop slightly, phosphate use is projected to stay unchanged and potash is forecast to increase modestly. These forecasts are based on the assumption that US farmers will plant about 90 million acres of corn, 69.7 million acres of soybeans and 63.5 million acres of all wheat in 2008.

Pressure On Producers

A second trend that remains intact this year — and lately has intensified — is cost pressure on crop nutrient producers. Higher energy and raw materials prices are driving up production costs to record levels. The production and distribution of crop nutrients are energy intensive so the recent increases in petroleum and natural gas prices have pushed up the cost of crop nutrients to farmers worldwide. In particular, the synthesis of anhydrous ammonia requires large amounts of natural gas or another hydrocarbon, both to fuel the process and to use as a feedstock. A typical nitrogen plant uses enough natural gas in one year to heat 128,000 homes in a large US city for an entire year!

In addition to energy, costs of key raw materials also have increased dramatically during the last year. Sulphur, an important raw material for the production of phosphate fertilizer, is a prime example. The price of sulphur has increased by a factor of four to six at key pricing points during the past 12 months and sulphur shortages are limiting phosphate output in many parts of the world.

The recent jumps in phosphate rock, sulphur and ammonia prices have sharply increased phosphate production costs, especially for non-integrated producers that purchase rather than mine rock. For example, the cost of these three raw materials delivered to an Indian port has increased from about $135 per tonne of DAP just five years ago to approximately $750 per tonne today.

 

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