The 2014 outlook for the crop nutrient supplier industry in North America remains favorable, supported by record 2013 corn production, above average corn prices and the highest reported level of U.S. farm income in more than four decades. Growers continue to have a significant incentive to plant corn to help feed the growing world population and support the production of renewable fuels.
During 2013, U.S. growers produced a record 14 billion bushels of corn, which is approximately one billion bushels higher than the previous record in 2009. At the same time, corn prices, while off their historic high, remain attractive and currently above the 10-year average of $4 per bushel. The USDA recently reported net farm income in 2013 of $131 billion, the highest level since 1973 on an inflation-adjusted basis and up $17 billion from 2012.
This combination of factors suggests that corn economics remain attractive. As a leading provider of nitrogen-based plant nutrients, CF Industries anticipates that U.S. growers will plant 92 million acres of corn in 2014, consistent with the five-year average. Along with other crops, this level of corn planted acres should lead to total U.S. nitrogen demand of 13.3 million nutrient tons in 2014, with domestic nitrogen producers operating as close to full capacity as possible, and imports satisfying approximately half of that demand.
A Look At The Dynamics
To understand the outlook for nitrogen fertilizers, it is important to understand the market dynamics that played out in the fall of 2013 and set the stage heading into 2014.
In the U.S., the harvest began late and continued behind average mainly due to the delayed spring planting season and a cool summer. As the season progressed, growing conditions generally were favorable and resulted in a record corn harvest. Throughout this period, we saw many growers and, consequently, fertilizer dealers and importers delay their purchases of plant nutrients. This was the result of the delayed harvest, the shortened fall application window and overall uncertainty about the direction of fertilizer prices.
Even though many growers and fertilizer dealers delayed their plant nutrient purchases in the fall, the profit potential from planting corn, wheat and other nitrogen-intensive crops supports robust planting intentions and underpins what CF Industries believes will be very positive nitrogen demand.
CF Industries believes nitrogen application rates in 2014 will be essentially unchanged from those of 2013. Fertilizer as a percent of farm revenue represents an excellent value. As a percent of corn revenue, 2014 U.S. fertilizer costs are projected to remain below the 10-year average of 20%.
As we move into spring, the North American supply and demand situation for nitrogen fertilizer appears to be balanced. The urea market is expected to experience the effects of natural gas supply constraints which have impacted a number of off-shore producers. The urea market should also benefit from what is projected to be a strong spring in North America and Europe, as well as high imports into South America.
At the same time, dealer inventories have been reported to be low and should require restocking. Ammonia should be in ample supply this spring. However, a combination of low dealer inventories and lower nitrogen imports sets the potential for tight availability for both urea and UAN.
Internationally, we expect 2014 will unfold differently than 2013. China’s new tax policy should have the effect of reducing seasonal price volatility in the urea market and, if market prices allow, should provide a more ratable supply. We believe that Chinese exports in 2014 will be similar to 2013 levels during the low tax window. We expect that India will absorb the lower priced Chinese exports along with Iranian exports. This should help balance Asian supply.
Commitment To The Nitrogen Market
During 2013, as growers and dealers delayed their fertilizer purchases, CF Industries was well positioned to maintain domestic production and supply by utilizing its extensive distribution network and by exporting, for the first time, all four primary nitrogen products.
During the year, the company completed its purchase of the remaining assets of Canadian Fertilizers Ltd., the entity which owns and operates CF Industries’ Medicine Hat Nitrogen Complex. This acquisition has provided the company access to an incremental 425,000 gross tons of ammonia and 275,000 tons of urea from the site’s existing production. Together with the subsequent purchase of new distribution locations in Alberta, Manitoba and Saskatchewan, this investment has significantly enhanced CF Industries’ ability to serve customers throughout Western Canada.
As CF Industries proceeds with the announced divestiture of its phosphate operations, the company is moving forward with its $3.8 billion investment in the construction of new nitrogen production capacity at our Donaldsonville, LA, and Port Neal, IA, nitrogen complexes. These projects are progressing on time and on budget and are expected to increase our nitrogen production capacity by 25% upon their completion in 2015 and 2016.