Adjusting To The New World Order
September 16, 2008 CHS Inc.: Managing The Madness
In these times of unprecedented fertilizer supply and price strain, retailers must work to solidify grower use intentions.
It was a roller-coaster ride for retailers trying to negotiate the fertilizer market in 2008. To get some perspective on the year past, and some planning tips on the market for the season ahead, we tapped a couple of industry experts at CHS Inc. for their views — Cheryl Schmura, vice president, crop nutrients, and Tim Chrislip, director, crop nutrients product supply and business development.
Share some perspective on the 2008 fertilizer season.
Cheryl Schmura: We thought product would be tight and we knew prices were escalating, but it occurred far more extensively in 2008 than what we anticipated last fall. And it was really all product categories: nitrogen, potash, and phosphate.
There were some surprises. Last summer, a Russian potash mine flooded, which heightened the global shortages and forced the market to put potash on allocation, and it continues to be on allocation. We’ve seen price spikes throughout the season — recently as high as $250 per ton. Then we saw China stepping out of the export market through a sizeable export tax on phosphate and nitrogen. Then the Chinese earthquake hit, further tightening phosphate supply. Urea hit $800 a short ton this year, and that was not on anybody’s radar when the price was just over $300 just a year ago.
Tim Chrislip: China and India are the major factors in the world urea market, and neither are market economies. The urea price for farmers in these countries is kept at low levels and has nothing to do with crop prices or supply or what the grower can afford to pay. The Indian government provided about $9 billion in subsidies in 2007, and that figure grew to about $29 billion this year. Farmers elect the parliament there and officials take care of the constituents through these subsidies. Because the U.S. imports two-thirds of its urea, it is at the mercy of international markets that are not based on our crop economics. We are fortunate now that grain prices support current fertilizer price levels, but the possibility for a disconnect to develop is there.
Despite the tightness of product, there were not any acres wanting coverage that did not get covered this past year. We were helped by late wet weather, which stretched the season.
Schmura: We should also mention that the high grain prices resulted in phenomenal margin calls during the most significant crop price run-ups, when corn was hitting $8 per bushel. We had customers who were in a fair amount of pain, with money tied up in fertilizer in addition to the margin calls. We saw consolidation among companies who tried to combine forces to weather the financial storm — it was really an unprecedented phenomenon.
What can retailers do to prepare for the upcoming fertilizer season?
Chrislip: I spent several years working at a retail operation, and the biggest issue out there is same one we had — the dealer does not have real business conversations with growers about their fertilizer plans, especially when prices are so high. We are in a market place with extraordinary price risk, and this requires that dealers sit with the grower and have a serious business discussion about crops, and inputs, and expected returns. Producers need to step up and make a commitment. If I were to recommend anything, it would be to have this kind of discussion with your top 10 or 20 customers. The person that can hedge the risk is the grower, and he has to get into the loop earlier.
Any “watchouts” for this fall and winter?
Chrislip: The ammonia distribution system is maxed out. Over the last three seasons the system has been within 3,000 tons of capacity, so what we’ve done in recent years is about all we can do. Now railroads are fighting ammonia transport. If additional rail capacity goes away, ammonia supply will continue to tighten. Among manufacturers, Terra and Koch are moving to increase their UAN capacity, which will take more ammonia out of the market. For this year, we recommend making ammonia commitments early to ensure adequate access to supply.
Schmura: On phosphate, supply should be adequate and is only two weeks away out of Florida. Potash is very tight, and some dealers may not be able to get what they want. And this situation will last for a while — the next significant potash capacity expansion won’t come until 2011.
How can retailers work with manufacturers to reduce risk?
Schmura: CHS crop nutrients has multiple, global sourcing options for multiple products, and with our broader supply base we can work with customers to position product. We also offer opportunities to tune into mass market intelligence, which is becoming increasingly important. And CHS has significant logistics and distribution strength, as we’re working closely with CHS grain marketing on a daily basis to maximize efficiencies.
PotashCorp: A Globally Driven Market
Al Mulhall explains how growing populations and improving econonies in developing countries are boosting demand for grains, and in turn, fertilizer.
What’s causing this seemingly sudden, unrelenting demand for fertilizer? In large part, it is the influence of the global marketplace, which has never been as evident as it is now.
A fundamental shift is taking hold, most notably among developing nations with rapidly growing populations — not just China but also India and the Southeast Asian countries. Strengthening economies in these regions are providing more people with higher incomes and greater opportunities to include meat-based protein in their diets.
Not so any longer. In six of the past eight crop years, global grain consumption outstripped production. In the current crop year, the low level of grain inventories is underpinning strong crop prices.
The global demand for grain has increased by approximately 30 million tons each year for the past 10 years. That has spiked the use of fertilizer ingredients — especially potash — to the point that all are now in short supply.
This hike in demand for all our products represents a significant continuing opportunity for all of us in agriculture — and we expect this to be the state of things for the next several years.
Looking ahead to this fall and next spring, futures markets for corn and soybeans project continuing solid prices. Deducting the cash cost of inputs from crop revenues projects net cash returns to farmers significantly better than the 10-year average.
In the U.S., the late, wet spring was followed by flooding in the Midwest. Despite this, USDA subsequently issued a relatively robust estimate for U.S. corn acreage and yield. Even this healthy outlook was challenged by rising global demand, and USDA projected low global stocks-to-use ratio for wheat and coarse grains and a major reduction in the U.S. corn stocks-to-use ratio. However, these inventories have the potential to become even tighter. Much of the corn crop was planted late and faces the risk of yield reduction due to adverse weather, including the potential for a preharvest frost.
Soybean markets are also expected to remain strong, with prices underpinned by the need to pay for enough acres to produce sufficient supply to meet buoyant world demand. A battle for acres is shaping up in the U.S. next spring, as corn plantings are projected to increase to approximately 92 million to 94 million acres.
The strong crop returns are expected to provide farmers with record net cash farm income for 2008, putting them in a good position to optimize their investment in their farms to prepare for the next season.
The 2009 net cash farm income is also expected to be one of the best ever, providing farmers with stability.
An excellent strategy used by farmers to boost yields is application of optimum and balanced levels of fertilizer. Many U.S. farmers are expected to plan to follow this strategy as they prepare for the coming seasons.
For the first time, they are expected to be joined by many farmers in developing countries around the world — many of whom have historically under-applied fertilizer and used nutrient ratios deficient in potash. They are now boosting their yields and their incomes. Rising demand for potash, in addition to nitrogen and phosphate fertilizers, is expected to maintain tight global fertilizer markets for all these products.
Mulhall is senior director of market research for PotashCorp.
Mosaic Co.: P, K By The Numbers
Mike Rahm provides a deep dive into the challenging supply and demand realities driving the current fertilizer situation for potash and phosphate.
Strong demand prospects, high raw materials costs, and a significant drop in phosphate exports from China, and well-stocked distribution pipelines in the Americas are expected to keep the phosphate market in balance during the fall application season. But the market is expected to tighten later this year if ag commodity prices continue to rally and boost demand prospects, China continues to restrict phosphate exports in 2009, and a good fall run empties pipelines.
Processed phosphate (DAP/MAP/TSP) import demand surged 14% or 2.7 million tonnes in 2007. Latin America, led by Argentina and Brazil, accounted for about two-thirds of this increase, but every other region — even western Europe — registered a gain in imports last year. Import demand is forecast to stay at this elevated level in 2008. A large jump in imports by India and a recovery of demand in Australia are projected to offset decreases in imports by Argentina, Brazil, and Mexico this year.
In India, processed phosphate imports are projected to climb 46% or almost 1.4 million tonnes to a record 4.3 million tonnes in 2008. The surge in imports this year is due to record phosphate demand, another above average monsoon, and a drop in the domestic fabrication of DAP from imported phosphate rock or phosphoric acid. In Australia, the potent mix of rain and high wheat prices has produced a strong recovery in demand and imports this year. Processed phosphate imports are projected to climb to 1.14 million tonnes in 2008, up from 0.87 million last year and up from just 0.59 million two years ago. In Latin America, import demand is projected to drop 14% or almost 1 million tonnes in 2008. Some of the increases in imports last year were carried over into this year. In addition, the re-start of the Fertinal plant has reduced Mexican imports this year.
On the supply side, China supplied all of the tonnage needed to meet the surge in demand last year — and then some. Chinese processed phosphate imports climbed 3.1 million tonnes or from 1.9 million tonnes in 2006 to 5 million tonnes in 2007. But we estimate that Chinese producers shorted their domestic customers by as much as 2 million tonnes in the process. As a result, Chinese planners increased export taxes on phosphate products 135% on April 20 in order to reduce exports and ensure supplies for domestic farmers. We estimate that Chinese exports will drop 35% or more than 1.7 million tonnes to 3.3 million tonnes in 2008.
The expected decline in Chinese exports this year creates a big hole that other producers will need to fill, especially during the last half of this year. China exported as much DAP and MAP during the first half of 2008 as it did during the first half of 2007. So the entire projected decline in DAP and MAP exports will take place during the second half of this year. We project that China will export less than 1 million tonnes of DAP/MAP during the last half of this year compared to 2.5 million tonnes during the last half of 2007.
On the U.S. front, domestic DAP/MAP shipments climbed to a record of more than 7.8 million tons in 2007-08, an increase of 9% or about 645,000 tons from a year earlier. Phosphate use, however, declined 1% to 2% last year due to the drop in corn acreage. Producers shipped more tonnage to distributors than what farmers applied in 2007-08. Phosphate use is forecast to increase about 2.5% in 2008-09 due to an expected rebound in corn acreage and continued profitable farm economics. DAP/MAP shipments are projected to decline to just under 7.8 million tons, a drop of less than 1% and the second highest level in recent history.
Potash: Victim Of Demand
The potash market remains extremely tight as mines continue to struggle to keep up with surging demand. After jumping 16% in 2007, world import demand is projected to increase another 2% in 2008, despite the fact that Chinese imports plunged 51% during the first half of the year. Demand prospects next year look even better given timely settlements of record volume contracts with Chinese customers and continued strong demand in other key importing countries.
Profitable farm economics for many potash-intensive crops such as palm oil, rice, and soybeans have stoked demand in the large Asian and Latin American markets. Brazil imported 6.7 million tonnes of potash in 2007, up 32% from the lower level of 2006, and imports are forecast to increase another 7% or almost one-half million tonnes to 7.2 million tonnes in 2008. Imports during the first half of 2008 were up 22% from the same period a year ago.
India also has stepped up potash imports this year, importing almost 2.8 million tonnes of potash during the first half of 2008. That’s up 92% or 1.3 million tonnes from the first half of 2007. Imports for the entire year are projected to climb to 4.9 million tonnes.
Chinese potash imports are projected to decline to just 6.4 million tonnes in 2008, down from a record 9.4 million tonnes last year. However, 2.5 million of the 3 million-tonne decline took place during the first half of this year. The sharp drop in imports this year, coupled with decent demand prospects, is expected to empty the Chinese pipeline by year end. As a result, China will import near record volumes next year.
On the domestic front, potash demand and shipments declined slightly but remained at high levels in 2007-08. We estimate that U.S. ag use declined 1% to 2% due to a drop in corn acreage and steady application rates on major field crops. The latest statistics indicate that North American shipments dropped about 1% to 6.9 million tons potassium in 2007-08.
U.S. use is projected to increase 3% to 3.5%. North American shipments are forecast to increase 5.5% to 6% to 7.3 million tons potassium in 2008-09 due to increases in U.S./Canadian ag and industrial demand as well as re-stocking an empty distribution pipeline.
Rahm is vice president, market and economic analysis, The Mosaic Co.
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