Fertilizer costs and production risk Posted on: 10.15.2007 11:48:00 AM Posted by Aaron Edmonds
Farmers are all too aware of the manner in which fertilizer prices have risen over the last 12 months. Inflationary trends in the cost of agricultural inputs are immense as a burgeoning demand base builds under record high agricultural commodity prices, and capacity constraints emerge that will likely restrict input availability. So what can farmers expect as we move toward a new production season and how will they react?
Firstly we have to appreciate that a major bull market has emerged for fertilizer commodities. This is reinforced by the stock price appreciation in all the major fertilizer producing stocks around the world. Potash Corp. being the most impressive mover. Equities markets are of the clear view that fertilizer demand will be robust and fertilizer pricing pressures remain to the upside. Further price rises are highly likely across all N, P, K and S based fertilizers.
What is interesting for nitrogen prices is that they have rallied without an associated natural gas price rise. Prior to October 2006 and the subsequent price run up, 80% of the variable cost of urea production came from the natural gas feedstock required. This meant that urea and other common nitrogen fertilizers closely tracked the price movements of natural gas. Natural gas markets have remained relatively stable with the recent run in oil prices but it is hard to see this trend continuing. At some point natural gas prices will push to the upside and increase the likelihood of further nitrogen price rises.
Potassium will likely be the big mover as we head into 2008. Global inventories are reducing significantly as demand ratchets. More and more crop waste is being removed from fields as livestock producers reel under the weight of expensive grain.
The fertilizer bull market will take years of investment in production capacity before we see any evidence of downward pressure on prices. Bull markets take years to build and years to be beaten.
For those farmers able to capitalise on high grain prices this year there will be some who bring forward much higher than normal fertilizer purchasing programs both as a means to manage tax issues but also to avoid anticipated price rises. This creates a doubling up of demand as it compounds two years into one.
Farmers will have to accept that expensive fertilizer increases the risk associated with producing grains. Risk in this context defined as the ability to generate profitable cropping outcomes. It is perceivable that this increase in risk will dramatically alter the way in which farmers operate into the future, particularly in marginal production areas and where irrigation is not available. They will be keen to meet the slightest hint of bullish demand for legume grain crops to reduce nitrogen use. They will also trend away from expensive compound blends to the more basic fertilizer commodities (superphosphate, MOP and urea) to get more units for the same cost. You may even find more farmers owning fertilizer stocks offsetting their cost base with fertilizer company dividends and likely capital growth in those stocks.
