Fertilizer: Some Promising Signs

In 2010, the fertilizer marketplace recovered much of the ground it lost in 2008 and 2009 — both figuratively and literally. According to figures compiled in the CropLife 100 ag retailers survey, fertilizer sales topped $10.1 billion for the year, an increase of 10%. Naturally, the question everyone in the industry is asking is if the market can build upon these gains in 2011.

So far, the signs look good. According to Joe Dillier, director of plant food for GROWMARK, Bloomington, IL, ag retailers saw a big fall fertility push this past year, and early indications are this will be followed by an equally busy spring. “If you look at the amount of corn acreage expected and how little fertilizer was applied during the late part of 2009, I would say things are looking very positive,” says Dillier.

As always, he adds, supply and price could be an issue if fertilizer becomes hard to obtain and more expensive to use. “Price is always difficult to predict, but right now, it’s not an issue for buyers,” says Dillier.

A Supplier’s View

In addition to ag retailers, fertilizer producers are also positive for the prospects for 2011. Recently, CropLife® magazine conducted an interview with Al Mulhall, senior director, market research, Potash Corp. of Saskatchewan (PotashCorp) looking at the outlook for fertilizer demand in 2011.

Q: What was the effect of the 2008-09 period on global fertilizer sales, applications and production?
In the 2008-09 period, growers and fertilizer dealers around the world reduced fertilizer inventories. Growers continued to plant and grow crops, but cut their fertilizer applications, drawing down stored nutrients in the soil. Fertilizer dealers continued to sell products to meet the diminished demand, but trimmed their purchases from producers, dropping their stock levels. In many cases, dealer inventories were reduced almost to the floor and product was obtained only as needed to meet outgoing orders rather than on a replacement basis.

Nitrogen needs to be applied each year due to its limited storage in the soil, so during 2008 and 2009 annual growth in consumption of ammonia for fertilizer production was trimmed from the usual 2% or more to less than 1%. Industrial applications consume about one-fifth of the world’s ammonia and when the substantial cutbacks in industrial use are included, total ammonia consumption declined by an annual average of about 0.5% in 2008 and 2009.

For phosphate, the net effect globally from 2007 to 2009 was a 10% reduction in consumption of phosphoric acid, the key ingredient in production of both fertilizer and industrial products.

Potash shipments plunged by close to half from 2007 to 2009 — the largest decline in history.

As a result of the cutbacks in applications by growers, the reduced inventory levels by fertilizer dealers and producers’ lower production to accommodate these changes, soil nutrient levels fell and the fertilizer supply chain was depleted.

Q: Did these application cutbacks affect global crop production?
Experts in the crop nutrition field have indicated that lowering soil nutrient levels heightens the sensitivity of crops to stresses such as adverse weather conditions, insect pests and disease.

When growing conditions are ideal, the impact on crop yields of cutbacks such as those during 2008-09 may be minimal. However, significant yield reductions can be expected if any of these stressors are present.

India was an exception to the general global trend of fertilizer cutbacks in the 2008-09 period. In 2010, it continued to boost fertilizer applications and also had good weather. Its production of wheat and coarse grains was up 7%.

However, in a number of countries unfavorable weather affected production of grain (which includes wheat and coarse grains). Argentina’s planted area was up 20%, however, its production increase was less at 17%. In Canada, the wet spring of 2010 reduced production by 8% compared to the previous year. In the U.S., summer nights that were warmer than normal led to smaller than usual kernels at the tip of corn cobs, which played a major role in a 4% reduction in production. Brazil experienced dry conditions associated with La Niña and its production was down 7%. In the European Union, dry conditions contributed to a 6% shortfall. Drought in Ukraine led to a 13% loss of production. Russia experienced the worst drought in more than a century and its production plunged by 37%.

Q: How have these production shortfalls affected inventories?
For wheat, the global stocks-to-use ratio was reduced substantially to below average. The coarse grains stocks-to-use ratio plunged to equal the lowest level in the past 30 years.

In the US, the corn stocks-to-use ratio fell to 6%; only once in the last 45 years has it been lower, and then only slightly.

Q: What effect is the crop production shortfall having on global grain markets?
The shortfall in Russia resulted in a ban on exports in August of 2010 to ensure sufficient supplies for the Russian domestic market. When it became apparent that the drought would also limit planting of winter wheat, this ban was extended to at least June 2011. Concern over its limited grain supplies led Russia to ask Ukraine to restrict grain exports to the rest of the world to allow Russian access to this product. Grain markets have tightened substantially.

Q: How is the supply/demand balance for other global crops? Has this changed recently?
The market for many commodity crops, including sugar, coffee, cotton, palm oil, bananas and soybeans, was already tight by May 2010 with prices 30% to 75% above the 10-year average. The booming global market for grains has escalated the battle for acreage to plant crops, requiring strong prices to defend against conversion of these acres to alternative crops and contributing to the recent additional tightening of commodity crop markets. Recently, these prices have been in the range of 50% to 170% above their 10-year averages.

Q: What kind of response to the strong crop prices are we seeing from growers? 
Strong crop prices have provided growers with the incentive to boost production, mainly by increasing fertilizer consumption on land farmed last year. Some small additions are expected to acreage in production around the world, which will also require more fertilizer.

Q: How is the fertilizer pipeline expected to respond to this increase in demand?
Earlier, we discussed the way the reductions in fertilizer demand in 2008 and 2009 lowered fertilizer stocks in the soil and in the distribution pipeline.

For nitrogen products, the growth in demand for ammonia and its derivatives is expected to be about 5% for the just-completed 2010 year and is projected to exceed 3% in 2011 as the manufacture of industrial goods and global crop production shift into a higher gear. Some nitrogen projects planned to provide new capacity were moved to the back burner during the downturn so limited new production is available, and the market is projected to continue tight through the spring season of 2011.

Industry consultants have estimated a strong increase in demand for the key phosphate fertilizer ingredient, phosphoric acid, of about 10% for 2010 followed by projections for a further 7% in 2011. As limited new production is expected in the short term, the phosphate market is also forecast to remain tight through the spring season.

For potash, we expect the final numbers will show 2010 global shipments were up more than 70% from 2009, from about 29 million tonnes to approximately 50 million tonnes. For 2011, we project a further increase in shipments of 10% to 20%, with demand in the range of 55-60 million tonnes. The lower end of this range is expected to meet immediate consumption needs, with the upper end including requirements as the world proceeds with replenishment of the depleted potash inventory. Our projections indicate demand in the area of 60 million tonnes would challenge the world’s potash operational capability, which we expect to be approximately 61 million tonnes in 2011. The balance between growing demand in the medium term and new capacity projected to come on stream are expected to maintain relatively tight markets.

Summing It All Up

The result of the rapid increase in shipments this year, says Mulhall, has been a generally tight supply-demand balance for fertilizer around the world. In the US, good planting weather in spring 2010 led to an early harvest followed by good movement of fertilizer to the fields. In many cases, dealers’ previously low inventories are now depleted with product going to the fields on a hand-to-mouth basis. Globally strong crop economics and tight fertilizer markets have set the stage for a potentially very brisk spring season.

“As we have seen very clearly this year, global weather conditions play a major role in the markets for both crops and fertilizer,” he says. “We expect another mixture of favorable and difficult weather this coming spring, and with continuing tight fertilizer markets, look forward to the challenge of helping to supply the US and the rest of the world with their fertilizer needs.”

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