Fertiliser market will remain volatile

The extreme volatility which has characterised the world fertiliser market for the last 18 months will continue for the foreseeable future, the Managing Director of Yara UK Limited told 150 farmer-members of AtlasFram Group who attended its ’Fertiliser Outlook for 2009/2010’ seminar at Haughley Park in Suffolk.

"Conditions in the global market have been truly exceptional and never before has the industry experienced anything like it. The magnitude of the increases in demand throughout the world took everyone by surprise and caused the massive price volatility which was seen last spring," explained Tove Andersen. Outlining the background to today’s market, Mrs Andersen added:

"Until 2003, the global fertiliser market had been oversupplied for a number of years, which meant low prices to end users but made it difficult for manufacturers to achieve an adequate return on their investment, forcing them to rationalise production. At the same time that these reductions in capacity were taking effect, demand began to increase.

Global grain production is the biggest driver of fertiliser prices and, with the exception of 2003, has increased during each of the last seven years. However, grain consumption has increased even more rapidly, by 1.7% per year, while global grain stocks have fallen to uncomfortably low levels, currently just 70 days inventory.

During the last two years farmers throughout the world have responded to increasing ’soft’ commodity prices by planting more crops and applying more fertilisers to boost production. At the same time, mainly for political reasons, the amount of fertiliser available on world markets has been declining. India, for example, has moved from being production/consumption neutral to a net importer, purchasing six million tonnes of previously-available supplies, 50% more than the UK’s entire annual fertiliser consumption.

The supply situation was exacerbated in 2008 when China imposed export taxes of up to 175% to discourage fertiliser exports and supply its domestic agricultural industry. Fertiliser exports from China virtually ceased in the fourth quarter of 2007, further reducing global supplies and forcing all other countries to compete for limited supplies. With no additional manufacturing capacity available, prices rose unexpectedly, and dramatically.

With the fundamental drivers of the fertiliser market, namely increasing demand and limited supplies, remaining unchanged no-one could have envisaged that fertiliser prices would do anything but continue to increase. That would have been the case but for the global financial crisis, which took the confidence out of the market, reduced the amount of funding available to support production in some countries and made farmers more reluctant to forward order, with the result that prices declined from their peak. Yara estimates that from July to December

2008 deliveries of nitrogen to Western Europe and the United States were 15% below those for the previous year, while during the fourth quarter of the year the global trade in urea fell by 38% and phosphate by 56%.

Despite the global recession the market fundamentals for farmers remain very strong, both in the short- and long-term. Demand for food is likely to remain on an upward trend and improving margins for farmers who are able to increase production will ensure that the strong demand for fertiliser continues. In turbulent market conditions, farmers’ uncertainty over grain and input prices may cause some to reduce variable costs by applying less-than-optimum levels of nitrogen. However, doing so will reduce output and increase their ’per-tonne’

cost of production, compromising the farm’s overall financial performance.

Increasing demand for fertilisers is currently not being matched by increasing production. Additional fertiliser manufacturing capacity takes five to 10 years to come on stream, depending on the type of facility, and carries a high cost.

Historically, only 25% is completed on time, even in normal economic conditions, so the prospects of significantly increasing fertiliser production in today’s difficult financial climate appear to be low. Until additional capacity comes on stream the supply and demand for fertilisers will remain finely balanced and markets extremely volatile."

Paul Rix of Evolve Tax & Accountancy LLP added: "The massive volatility in input costs and commodity prices during the last 18 months underline the need for farmers to become much better at managing risk. Typically, fertiliser costs for an arable farm have increased from £125/ha two years ago to £292/ha today, equivalent to a rise from £13.15 per tonne of wheat produced in 2007 to £30.73 for the current year. The more expensive fertiliser becomes the less farmers tend to apply, but it is important to recognise that reducing nitrogen use by 40kg/acre equates to a loss of 0.2 tonnes in yield, worth £25 with wheat at £125/tonne.

"Farmers must work closely with their agronomist to calculate the ’Margin Over Ammonium Nitrate’ and arrive at optimum application levels, then sell at least a proportion of the crop when market conditions are in their favour to lock in a known profit. Those who are nervous about doing so because prices might subsequently rise could consider purchasing an option, which would enable them to remain in the market but benefit from any increase."