A growth business: An introduction to fertiliser markets

Fertilisers play an essential role in crop development.

They have been the single most important catalyst in improving crop yields over the past 40-50 years, enabling farmers to produce enough food to support global population growth.

As this article shows, fertilisers are highly energy intensive requiring huge amounts of fossil fuels. Higher energy prices directly feed into an increase in fertiliser prices. Fertilisers make up a significant share of the costs involved with agriculture, and so any increase in cost is likely to be passed onto the next stage in the supply chain and eventually onto the end consumer.

With that in mind consider that in early October this year, fertiliser prices in North America hit record levels, beating the previous peak that occurred in August 2008.

Fertilisers are commodities in their own right. Yet they are often ignored except when they become painfully expensive. That’s where we are right now.

This article aims to dig a little deeper into the various types of fertiliser commodities, and highlights some of the major factors that commodity investors should be aware of.

Chart: Green Markets Weekly North America Fertilizer Price Index

Source: Green Markets North America Fertilizer Price Index

Most fertilisers commonly used in agriculture contain the three chemical elements: nitrogen, phosphate, and potassium. These nutrients are used in varying proportions according to the nature of the crops and soil types – typically described as the NPK ratio. NPK refers to the initials of the three elements – N for nitrogen, P for phosphate and K for potassium.

Nitrogen (N)

Nitrogen is packed with proteins, and is essential for the growth and development of crops growth, vigour, and colour. It is the most important of the three chemical elements that make up NPK and makes up about 60% of global demand. Without an adequate supply of nitrogen applied every year, crop yields will suffer.

The primary feedstock required to manufacture nitrogen fertilizer is natural gas. The gas is upgraded by combining it with nitrogen from the air to form two end products – ammonium nitrate and urea. Mixing these products together forms UAN.

Around 80% of the natural gas is used as feed­stock for fertilizer while the rest is used for heating the process and producing electricity. An alternative method to produce nitrogen fertilizer is gasification of anthracite coal. The higher that natural gas prices rise, the more economic that coal gasification becomes (however the environmental impact in terms of emissions is significantly higher).

Nitrogen is abundantly available, yet very energy intensive to extract. In contrast, phosphate and potash are limited by globally available reserves. Production of nitrogen fertilizer tends to be centered on regions with high population demand and / or abundant natural gas. For example, China, India, the United States, Russia, Canada, and a number of countries in North Africa and the Middle East.

Phosphate (P)

Phosphate, the first key fertilizer, contains phosphorous, an important element for the human body to build and repair cell walls. It is found in the form of phosphate rock, which is processed into DAP (Di-Ammonium of Phosphate) by the separation of phosphate from the mix of sand, clay and phosphate.

While nearly thirty countries produce phosphate rock, China, the US and Morocco are the largest producers, accounting together for two-thirds of the world production. Morocco alone accounts for more than 30% according to data from the US Geological Survey. Annual global production is around 170 million tonnes while estimated reserves stand at 15 billion tonnes; Morocco alone represents close to half of the world′s proven phosphate rock reserves.

Potash (K)

Potash refers to mined salts that contain potassium in water soluble form. Known as ‘pink gold’, potash is important for agriculture as it helps strengthen plant roots and boosts drought resistance.

Canada is the world′s largest producer, followed by Russia and Belarus. The most significant reserve of Canada′s potash is located in the province of Saskatchewan, and controlled by the Potash Corporation of Saskatchewan.

The world′s largest consumers of potash are China, the United States, Brazil and India. Brazil imports 90% of the potash it needs. On the other side, the potash market is dominated by India and China. While India has to import all its potash, China imports about half its annual requirements of 10-11 million tonnes. China has 20% of the world’s population but only 10% of its arable land, has long been trying to bring potash prices down. The two buyers try to use their monopsony power in order to bring about the best deal for their economies.

Both phosphate and potash do not typically need to be applied as frequently as nitrogen. Soil tends to absorb phosphate and potash for a longer period than nitrogen.

Factors affecting the supply of fertiliser

Energy costs: The production of fertilisers is extremely energy intensive. For example, the primary feedstock required to manufacture ammonia is natural gas, the main ingredient in nitrogen fertiliser. Higher natural gas prices often lead to an increase in the price of nitrogen fertiliser. Given its dependence on natural gas this makes nitrogen fertiliser especially volatile compared to other types of fertiliser. Fertiliser (whether that’s N, P or K), is very energy intensive to transport too. Refined crude oil products are used to deliver fertiliser through pipelines, barges, dry bulk shipping, etc. An increase in the price of crude oil and refined products may also lead to higher fertiliser prices.

Transport costs: Given the concentrated nature of the supply and demand for fertiliser, they are often transported long distances by dry bulk ship from producing to consuming countries. Fertiliser is also bulky to transport, in both solid or liquid form. Although fuel is one component of the cost of shipping, it’s not the only factor. For example, ammonia is extremely hazardous and so it requires expensive, specialised containers in order to transport it safely.

Raw material input costs: Phosphate rock, sulphur and ammonia are the three raw materials used in the production of DAP. Ammonia, of course is also used in the manufacture of nitrogen fertiliser. If the cost of these raw materials increase then that cost can feed through into higher fertiliser prices. This is especially concerning for producers that are not vertically integrated, as they have to pay market rate for the raw materials.
Fertilizer export associations and legal protections: The global trade in phosphate and potash is largely controlled by a few export associations or companies. For example, Canada’s potash export association (CANPOTEX), is protected by exemptions to certain antitrust rules in pricing fertiliser exports. Other major exporters also afford their export associations strong influence in setting prices for global markets.

Oligopolistic behaviour: Phosphate and potash power is concentrated in the hands of a small number of major exporters. The potash market in particular has long been characterised by cartel arrangements between major producing and exporting countries. In the early 20th Century Germany had a monopoly on the export market while restricting production along with its neighbour France. More recently the market has been dominated by a production agreement between Russia and Belarus. The Belarusian company, Belaruskali and the Russian group Uralkali, had formed a cartel known as the Belarusian Potash Company (BPC). This changed in mid-2013 with the end of the Russian-Belarusian agreement. The Russian contingent announced it was leaving the cartel in order to increase its market share. Perhaps predictably the Belarusian’s responded in kind embarking on an aggressive pricing strategy, signing deals with China and the US at levels that would penalise its competitors.

Factors affecting the demand for fertiliser

Population and economic growth: The more mouths there are to feed the stronger the demand for fertilizer to maximise the yield from the soil. The wealthier nations become, the higher the calorie consumption and the more that meat, dairy products and vegetable oils feature in peoples diets – both of these factors increase the demand pull on fertiliser. For example, around 20-30% of nitrogen fertiliser consumption is thought to be associated with meat production. Fears of food insecurity in a growing population are behind India and China’s need to secure sufficient fertiliser, at the right price.

Trade policies: Major exporters may seek to restrict the amount they export (perhaps through the use of tariffs), should they feel that domestic consumers of fertilisers may face a shortage. However, with less of the fertiliser on the global market, there is less supply for everyone else.

Subsidies: Some countries subsidise or cap the price of fertilisers for domestic farmers with the aim of ensuring food security. However, this means farmers are not as responsive to changes in the price of fertiliser as other farmers are, elsewhere in the world who do not benefit from subsidies. This means that demand for (and the price of) fertiliser may not decrease as much as it would do in the absence of such policies.

Crop prices: An increase in crop prices tends to mean higher profit margins for farmers. This should encourage farmers to expand the number of acres they plant, from which they can apply fertiliser (an increase in demand), and so take advantage of expected high crop prices. Fertiliser typically represents around one-fifth of total US corn production costs – the relative share for the other major crops is much smaller ~5% for soybeans and 10% for wheat. This means that a proportionate increase in fertiliser costs impacts affordability for corn farmers much more strongly than it does for soybean or wheat.

Planting intentions: The key word in the previous paragraph is ‘expected’. If farmers fear that crop prices will be low in the future, or that demand won’t be as strong when the crop is eventually harvested then they may not seek to expand the number of acres they plant. This is negative for fertiliser demand. The opposite is true if planting intentions are strong.

Seasonality / weather: Fertiliser is typically applied when seeds are planted. This implies that the main application on the northern Hemisphere is during the first half of the calendar year while on the southern Hemisphere it is during the second half of the calendar year. Winter wheat is an exception in which planting is typically done in the second half of the year while the fertiliser is applied in the spring. The weather also plays its part in influencing short term demand for fertiliser. For example, if conditions are too hot, too cold or too wet for planting then fertiliser demand may be pushed out further in the planting season.

Related article: Potash: The pink gold rush

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