View From The Manufacturers
In this special section, key crop nutrient suppliers to the North American ag retail distribution channel provide their views on how the market for fertilizer might take shape during 2007.
September 8, 2008
A Tale Of Two Years
A year ago, U.S. growers were evaluating how many acres to switch from corn to soybeans due to low corn prices and record high nitrogen costs. Today, the corn market is screaming at growers to plant about 9 million more acres this spring than last year.
A year ago, growers had just harvested an 11.11 billion-bushel corn crop and stocks at the end of the 2005-06 crop year were projected to stay in the 2 billion-bushel range. According to the latest USDA statistics, growers have just put a 10.54 billion-bushel crop in the bin and strong demand, fueled in large part by the growth in ethanol production, is expected to pull down stocks to 752 million bushels or just 6.4% of projected use by the end of the 2006-07 crop year. That is the second lowest percentage in modern history. If these demand projections are on target, demand this crop year will exceed the 2006 corn harvest by 1.2 billion bushels! There will be significantly less corn in storage at the start of the 2007-08 crop year and production will have to increase to meet projected food and fuel uses. That means both more acres and higher yields are needed during the upcoming growing season. In mid-January, the 2007 new crop price of corn was trading at $3.95 per bushel, up almost $1.50 from the same time a year ago.
Corn is not the only game in town, however. Even the new crop price of soybeans was trading at $7.64 per bushel in mid-January, up more than $1.60 from last year, despite a record projected carry out at the end of 2006-07. Soybeans can not give up unlimited acres this spring without jeopardizing stocks by the end of the 2007-08 crop year. Wheat was the first grain to rally and the new crop price of hard red winter wheat still was trading north of $5.00 per bushel in mid-January, up roughly a buck-and-a-quarter from a year ago.
The sharply higher grain and oilseed prices are fueling the most optimistic U.S. nutrient demand outlook since 2003-04 or since the last bull-run in agricultural prices. The recovery this year, however, feels even stronger given the large declines in nutrient use during the last two fertilizer years. If U.S. growers plant 87 million acres of corn this spring and if application rates recover just moderately from the lower levels of the last two years, then U.S. nutrient use is projected to increase about 10% during the 2006-07 fertilizer year. Nitrogen (N), phosphate (P), and potash (K) use are projected to increase 9%, 10%, and 12%, respectively.
Shipments of solid fertilizer products got off to a slow start last fall despite this increasingly strong demand outlook. Industry statistics indicate that combined shipments of the main solid fertilizer products during the first five months of the fertilizer year (July through November) were off 2% from the low level of last year and off 18% from the best analog year (2003-04). If these demand forecasts are on target, shipments during the last seven months of the fertilizer year (December through June) would have to increase 21% from last year and 5% from the analog year. Producers and distributors would have to accomplish this from fewer U.S. nitrogen and phosphate production points today than three years ago. The main solid fertilizer products include urea, diammonium phosphate (DAP), monoammonium phosphate (MAP), and muriate of potash.
Shipments got off to a slow start last fall for many reasons. For example, U.S. N imports were off sharply from the previous year due to strong global demand during the last half of 2006, especially in India. U.S. urea imports from offshore origins were off about 50% or 1 million tons during the first five months of the fertilizer year. U.S. UAN solution imports were off about 40%, or 1â„2 million tons, during the same period.
The spring season may prove to be one of the most exciting and challenging in recent history.
The Outlook For Spring
Fast-forward to the present. The high transportation fuel costs are still with us and are not expected to go away anytime soon. However, crop prices have soared.
Surging ethanol production is consuming more and more of the U.S. corn crop. It required 6% of the corn harvested in 2000, jumped to 18% of the 2006 harvest, and is expected to consume one-quarter of the corn grown in the U.S. this year. By 2010, ethanol is expected to need 30% of the corn harvest. Global corn production has not kept pace with this growing demand, and USDA data shows inventories have plunged.
At the same time, global wheat production has been down due to unfavorable weather conditions. Inventories of wheat, too, have fallen drastically. By the end of the current crop year, the stocks-to-use ratio for wheat and coarse grains is projected to fall to 15%, the lowest it has been in USDA history, and less than two months' supply. This has driven prices for wheat and corn up substantially.
Soybean prices have also risen as a result of competition with wheat and corn for planted acres.
The Case For More Fertilizer
The outlook for 2007 is very positive. Soil fertility needs to be restored and, at the same time, good crop prices encourage growers to increase fertilizer application rates to improve yields. In addition, many growers, particularly in the Midwest, are expected to shift from soybeans to corn to take advantage of the high corn prices. Planted acres of corn — a high fertilizer-consuming crop — are projected by industry consultants to jump from 79 million in 2006 to 83 million to 85 million in 2007. We expect another positive for fertilizer use, since planting corn after corn requires about 40 more pounds per acre of nitrogen than a corn-after-soybean rotation.
With these excellent fundamentals in place, we anticipate strong growth in 2007 sales of nitrogen (N), phosphate (P), and potash (K).
Global events are expected to maintain a tight the U.S. N market. The high oil prices we discussed earlier have had a major impact on Europe, where they are linked to natural gas prices. As a result, natural gas has been more expensive there than in the U.S. This led to curtailment of a substantial part of Europe's N production, requiring imports to replace this product. Internationally-traded N that had been going to the U.S. was rerouted to Europe, tightening the U.S. market. This snug supply/demand balance is expected to last through the spring.
The P market is responding to both offshore and domestic events. The U.S. is by far the world's largest exporter of P fertilizer, but its exports are being displaced by new production capacity in its offshore markets.
China has had a large impact here. It has been rapidly increasing its domestic P production, displacing fertilizer formerly imported from the U.S. China has also affected U.S. sales to Australia. Until recently, Australia exported about half of its P production to Southeast Asia and used the rest at home, supplementing it with imports from the U.S. With the growth in its P industry, China has been exporting to Southeast Asian markets, displacing Australian product, which instead was marketed at home. In a domino effect, it displaced U.S. product in Australian markets.
Against the background of a reduction in U.S. P fertilizer exports, we saw permanent and indefinite curtailment of three P operations. These shutdowns took place in late 2005 and mid-2006. This tightened the U.S. P market, which is expected to remain tight beyond the 2007 season.
The K market is expected to be exceptionally strong, due to heavy demand in both domestic and offshore markets.
In 2006, supply contract negotiations with India and China lasted well into the third quarter. India and China drew down their inventories so they could continue to apply this essential nutrient. Shipments from Canpotex resumed partway through the third quarter, but have only partially restocked those depleted inventories. Both countries will need to import more product for their busy spring seasons, so we expect the global K market will be tight this spring.
In summary, we expect a tremendous spring season with the best fundamentals we have seen in many years. Soil nutrient levels are down, crop prices have strengthened, and biofuels production is booming — factors that together are expected to lead to strong fertilizer application rates. In these promising times, we at PotashCorp are prepared to provide the fertilizer that farmers need to meet the world's growing demand for their crops.
A Corn Driven Outlook
The outlook for global and North American agricultural markets has improved dramatically over the past year, which should contribute to much stronger nutrient demand conditions in 2007. The biggest driver for U.S. nutrient demand is the run up in corn prices and the potential for a more than 5 million acre increase in U.S. corn acres. In general, the rise in grain and oilseed prices should benefit farm cash flows and lead to higher overall nutrient application rates.
In the nitrogen (N) market, the primary focus last year was the impact of high and volatile gas prices on North American production costs and operating rates. North American gas prices have retreated compared to last winter, although global energy prices remain high compared to historical levels. The recent rise in N prices has been driven by the expectation of strong demand as opposed to high-energy prices.
The pace of offshore nitrogen imports could be the biggest factor to watch through the first half of 2007. Urea imports into the U.S. for the current fertilizer year are down 36% and ammonia imports are down 10% compared to the previous year. North American N producers have responded with higher operating rates, but there is limited ability to increase domestic production, given there is limited idle capacity. New global N capacity is expected to come online over the next six months, but will not be operational in time to impact the spring season in North America.
The outlook for the potash (K) market has improved in the past few months with strong demand fundamentals and the flooding of a Russian mine, which accounted for approximately 3% of global K trade. We anticipate demand will be supported by higher grain prices and the need for growers to catch up following a year of lower application rates. Producer inventory levels have returned to more historical levels after a period of excess supply during the first half of 2006. K producer operating rates should increase in 2007 in order to meet the expected increase in demand.
The phosphate (P) market has been supported by production curtailments in the U.S. over the past year. U.S. P production is down 8% for the current fertilizer year and producer inventories were down 37% at the end of November. Cost side pressure from high ammonia prices and rising phosphate rock costs should provide underlying support to the P market. A major wild card in the P market is the ability of China to increase domestic P production and continue to displace imports.
The biggest challenge for the industry in 2007 could be transportation and logistics, given the amount of product that will need to be moved in a short time period. Rates for all transportation modes continue to increase as fuel costs remain high and many carriers are operating near capacity. Rail rates for transporting ammonia have risen sharply as carriers look to reduce their liability associated with carrying products such as ammonia. The transportation system could have a major impact on the cost and availability of product for the spring season.
Rahm is vice president, The Mosaic Co.
Delaney is president of PCS Sales, Northbrook, IL.
Holzman is analyst in the business development and strategy group for Agrium, Calgary, AB, CAN.