Compared to its performance in 2016, the fertilizer market could see a slight rebound in 2017. Or it could look identical to what the industry just experienced. At this point, it’s still a bit hard to tell.
However, according to Kathy Mathers, Vice President of Public Affairs for The Fertilizer Institute, the marketplace will likely be up or down based upon a few key factors. “If you look at our overall industry, it basically goes back to Economics 101, where you need to look at the laws of supply and demand,” said Mathers, speaking at the 2017 Wisconsin AgriBusiness Classic in early January.
Throughout much of 2016, supply seemingly outstripped supply. According to statistics gathered during the 2016 CropLife 100 survey of the nation’s top ag retailers, fertilizer revenues dropped 7.4% to $13.5 billion. This was down $1 billion from the 2015 total and the third straight year that fertilizer income for CropLife 100 retailers has fallen.
And as Mathers pointed out in her talk, fertilizer’s fortunes each year depend more on countries outside the U.S. than has historically been the case. In fact, according to USDA numbers, China is the world’s No. 1 user of fertilizer, consuming 29% of global supply. India comes in second at 14%, with the U.S. slightly behind at 11%.
Perhaps more important to fertilizer usage numbers/revenues in recent years in the U.S. ties back to grower-customer income levels. Starting in the early 2010s, farmer income across the country were on a rapid, steady rise as global demand for U.S. crops hit record highs. Not too many years ago, the marketplace for farmer income topped the $100 billion mark.
During the past few years, however, crop prices have been in a continually state of declining prices. By the end of 2016, farm incomes in the U.S. were forecast by USDA to be just slightly over the $71 billion figure. As Mathers pointed out in her talk: “This is the lowest level of farm income reported by U.S. farmers since 2009.”
A Lower Cost of Production
According to Mathers, the good news of commodity prices dropping is the cost of natural gas and producing nitrogen-based fertilizers has also been on the wane. “I was a history major, so I am here to remind you of what the natural gas industry looked like back in the 1990s,” she said. “At that time, natural gas supplies were very tight and prices were very volatile. This convinced many suppliers to shut down their production plants, and domestic nitrogen production dropped by 44% with imports making up the difference. Back then, I thought the industry would keep moving out of the U.S. and would not come back, and there were many publications that quoted saying just this. Well, I was wrong because of the shale gas revolution. Now, nitrogen production in the U.S. has rebounded nicely.”
According to Mathers, there are currently plans for seven new nitrogen production plants to open in the U.S. during 2017, and “the vast majority of this will be targeted at the agricultural market.” In fact, between 2016 and 2020, nearly 5 million tons of new nitrogen capacity will be built in the U.S., compared with 18 million tons anticipated on the global stage.
“The U.S. is now leading the world in new nitrogen capacity developments to 2020, accounting for more than one-quarter of the total estimated global increase,” she said. “However, even after these projects are completed, the U.S. will likely still depend on nitrogen imports for an estimated 25% of its total nitrogen supply.”
But grower-customers should benefit in several ways from this situation, not the least of which is more flexibility especially when it comes to crop plantings. “When nitrogen supply moved to primarily imports, farmers were forced to make their in-the-field decisions much earlier to make sure to get the nitrogen they needed,” said Mathers. “But this new supply will displace imports and should create some transportation efficiencies as the sources of nitrogen will be closer to where the crops are being grown here in the U.S.”
Corn is Key
Of course, as Mathers pointed out in her speech, if an observer wants to gauge how fertilizer demand will fair in any given year, he/she should keep an eye on corn. “Corn is the driver and uses about half of all the fertilizer used in the U.S. each year,” she said.
In recent years, U.S. growers have typically planted in excess of 95 million acres of corn each and every year, despite their falling prices on the commodities market. However, in the early planting intentions survey conducted by USDA, U.S. growers look to be cutting back on their corn acreage with only 90 million acres being planted. “After declining since the spring of 2014, fertilizer prices are in-line with corn (and other major crops) prices,” said Mathers. “However, cost-cutting resulting from lower farm income may limit rates applied for phosphate and potash.”