Following the pan asset sell-off of risky assets in the summer, the downside risks to the global economy intensified in October, as financial markets concern about the Eurozone sovereign debt crisis grew; reports that Greece would miss a deficit target and the subsequent downgrade of Spain and Italy’s credit ratings, created huge market uncertainty, causing share values to sink even lower. Markets were supported when European leaders pledged to stem the debt-crisis in the Eurozone by the end of October. However, the EU leaders’ determination to shore up the region’s financial sector, including the recapitalization of European banks, while protecting other EU countries from further contagion, including France, is proving more complex and may not be as readily solvable as previously hoped. Like other risky asset classes, shares in fertilizer groups have witnessed a significant fall in value, while grains and oilseeds, which had enjoyed a period of sustained market strength due to historically low stocks and strong demand, proved they were not immune; prices fell sharply as investors liquidated positions.
 
FAO CALLS FOR GREATER INVESTMENT IN AGRICULTURE
While the substantial fall in grain and oilseed prices from those seen in the summer will be welcomed by livestock producers, feed, food and industrial users around the world, growing concerns over food insecurity in the developing world promptedthis year’s theme for World Food Day, ‘Food prices — from crisis to stability’, chosen to shed some light on the reasons why food prices, which were stable for decades, have become increasingly volatile; with high, unpredictable prices, likely to continue as supply struggles to keep pace with demand. Increased wealth means many people worldwide are eating more meat and dairy products, driving up the price of animal feed, and, with 80 million people born every year (global population expected to rise to seven billion in 2011), creates more demand for food. And while various options can be introduced to mitigate the effects of volatility on the poor, the UN’s Food and Agricultural Organization (FAO) Director General, Dr. Jacques Diouf believes, stability in the food market depends, ultimately, on increased investment in agriculture, particularly in developing countries, where 98% of the hungry live and where food production needs to double by 2050 to feed the growing populations.
 
FOOD DEMAND DRIVES FERTILIZER GROWTH IN 2012
The combination of growing demand for food, the need to replenish low grain stocks, and historically high and volatile commodity prices, which look unlikely to fall much further given tight inventories, are expected to encourage farmers to ramp-up plantings in 2012, driving fertilizer demand. The International Fertilizer Association (IFA) expects fertilizer demand to grow by a modest 2.5% to 176.4mt (million tonnes) nutrients in 2011/12, following a record 5% increase in the previous year. Potash (K) demand is forecast to increase by over 5% this year, while growth rates for nitrogen (N) and phosphate (P), are seen as more moderate. Fertilizer consumption is expected to rise in all the regions, with a strong rebound in Eastern Europe and Central Asia (EECA), with the largest gains anticipated in East & South Asia and Latin America. All three nutrients are anticipated to increase in all the regions, with the exception of P in Western and Central Europe and K in Oceania; global fertilizer demand is forecast to increase to 191.1mt Nutrients by 2015/16.
 
ECONOMIC UNCERTAINTY LIKELY TO CURB FURTHER RISE IN FERTILIZER PRICES IN 2012
Due to strong demand for fertilizers, there has been a significant increase in prices for: ammonia (+40–56%); potash (+40%;) and urea (+44%) over last year. And, while further price increases for some nutrients in the October to December quarter — helped by tighter supplies and demand from South American growers during corn and soyabean sowing periods — may occur, given global economic uncertainties, Rabobank expects any further increases in prices to be modest, reflected by falling farmer confidence, tumbling share and volatile commodity prices. Gary Anderson, chief executive of North American silos manufacturer Ag Growth, also identified a more reflective attitude in many farmers’ purchasing behaviour, although he attributed the change more to uncertainty, given the difficult and highly variable weather conditions experienced during the course of the growing season.
 
SHARE PRICES IN POTASH CORP,AGRIUM AND MOSAIC
During the liquidation phase, share values in fertilizer companies, suffered significant losses — Mosaic’s share value fell by up to 15%, while in other companies like Potash Corp and Agrium losses were smaller. Since the sell-off, share prices in fertilizers groups have begun to recover: Potash Corp (18 October) U$49.66 (U$43.19),Agrium (18 October) U$ 74.87 (U$67.55) Mosaic (18 October) U$55.20 (U$48.65). Credit Suisse, recently restated its enthusiasm for shares in fertilizer groups forecasting a tight supply outlook for nutrients going forward, and, that the fall in share values was harsh, given that fertilizer prices had outperformed market expectations over the summer and looked to remain elevated. Even after the round of selling in soft commodity futures along with other risk assets, fertilizer, especially nitrogen, remained a viable investment for farmers; while urea and potash continue to look very affordable for farmers on current corn prices as well as December 2012 corn futures; diammonium phosphate (DAP) also appears reasonably priced relative to current spot prices but looks expensive on December 2012 corn futures.
 
HARVEST RESULTS MUCH IMPROVED BUT NOT SUFFICIENT TO SATISFY COARSE GRAIN DEMAND & REPLENISH STOCKS
With an increase in the planted area for grains up by over 4m hectares, prospects for the global harvest have improved, despite the exceptionally difficult weather conditions experienced from planting through to harvest. USDA forecast the 2011 global cereal harvest at a record 2.28 Bn/t, some 82mt above the drought reduced 2010 crop. While the US corn crop is lower, crops in other key corn growing areas improved, along with better expectations for rice and wheat. Despite the global economic uncertainties, USDA forecast overall grain use to rise by 48mt to a record 2.28Bn/t, with grain for feed use forecast to climb by 28mt to a record 787mt — with a number of countries, posting gains; a relative price-induced shift is likely to boost wheat feed use to 126mt up 11%. The global oilseed crop is forecast at 453mt — smaller output of soyabeans partially offset by gains in other oilseeds with oilmeals for feed to rise by 9mt to 260mt. While overall cereal consumption is forecast to match production; consumption of coarse grains is expected to outstrip supply by over 12mt, cutting the global corn stock-to- use ratio to around 13%. In the US where drought has cut corn yields to 148.1bu/acre-corn stocks-to-use ratio is expected to fall below 8%.
 
DESPITE RECORD CROPS CROP PRICES REMAIN HIGH
With the wheat crop, 33mt more than last year, wheat futures prices, which peaked in the summer have since fallen back, pressured by much larger stocks and are currently $6.303/4/bu (20 October). Export prices of the benchmark (US No 2 Hard Red Winter) are quoted at U$300/t FOB [free on board] (19 October), lower than those seen in August (U$336/t), but above last year (U$289/t).
CBOT futures price for corn fell sharply from U$8/bu in the summer to U$6.491/2/bu (Oct 20). But despite the fall in grain and oilseed prices from their peak in mid-year, corn prices supported by strong demand and low stocks look set to remain above U$6/bu, and some 38% above the five year average of U$4.61. Near-term corn futures are being fuelled by expectations that the ethanol tax breaks will be phased out by the end of the year, prompting bio-fuel plants to buy more grain as they ramp-up production.
Chicago’s December corn contract has been a notable ‘outperformer’ this month, rebounding 20% while the next lot, for March 2012 delivery, has recovered just 9%. The revival, which has significantly narrowed the discount, has been attributed to farmers reluctant to sell at prices — well below summer highs — but offer users big profits. Export prices for US corn (yellow-No2) quoted at U$281/t FOB Gulf (19 October) are historically higher than previous years, but below those seen in August (U$316/t), as corn prices have fallen due to macroeconomic factors, potentially good crops in the southern hemisphere and larger old crop supplies. With US hog and ethanol margins remaining strong, and corn exports lifted by sales of around 1mt to China (14 October), suggests that demand is possibly more robust than USDA estimates imply, as cash prices remain strong.
 
WHEAT PLANTINGS FOR 2012 EXPECTED TO INCREASE AS FARMERS EXPLOIT HISTORICALLY HIGH CROP PRICES
In many parts of the northern hemisphere winter wheat plantings for the 2012 harvest are under way, as farmers exploit historically high crop prices.
Early estimates by the IGC suggest global plantings will be increased by 1.5% to 225m/ha in 2012/13, with corn plantings over 171m/ha. Weather conditions in key growing areas are generally favourable with the exception of the US, where prolonged dryness in southern parts is hampering fieldwork and in the Ukraine, where conditions are also adversely dry. Early indications point to a considerable increase in wheat plantings (+6%) in the US after relatively small areas in the past two years while the area for corn is expected to be within a range of 91–94m/acres, and soyabeans 76–78m/acres. The wheat area is also expected to expand in the CIS countries, to take advantage of strong domestic and international demand. While, in the EU farmers are to raise grain sowings by 700,000/ha by bringing land previously set-aside, back into production increasing plantings for the EU cereal harvest to 56.3m/ha; the highest since 2009 — with increased plantings of durum wheat (+10%) and spring barley (+6%) while the soft wheat and corn areas are expected to remain relatively unchanged. Elsewhere, in Asia, persistent dryness in parts of China and severe floods in the Sindh province of Pakistan could impact on the sown area in the affected regions. While continuing relatively high prices are providing the necessary incentive for Indian farmers to plant wheat, with the area expected to remain near normal.
Robust soyabean crop prices (which drive Canadian canola) remaining strong at U$12.25/bu (Oct 20), compared with the five-year average of U$10.70. The expectation of lower production in the US has led to increased investment by soyabean growers in Brazil and Argentina-official data estimated Brazil’s soyabean area expected to expand by up to 3.5%, with summer corn sowings rising by up to 7%. Argentina’s corn sowings are increased to 4.1m/ha while the wheat crop has been pegged at 12.6mt the upper end of the range.
 
SHALE GAS REDUCES INPUT COSTS FOR US NITROGEN PRODUCERS
With strong demand, limited additions to capacity in recent years and some delays to projects, like Qatar’s Qafco V plant and Algeria’s Sofert site, the nitrogen market has tightened. Beginning in 2012, a number of new nitrogen plants are expected to come on stream due to a strong desire for consuming countries to reduce urea imports and for existing countries to add capacity. The development and use of shale gas by US nitrogen producers has cut input costs and significantly improved their competitive edge (for at least the next three to five years), over Western Europe and Ukraine suppliers. In Europe, major buyers purchase gas from the spot market but still meet a significant proportion through contracts linked to the price of oil; while gas prices in the Ukraine for Russian imports are based on a similar formula and remain above those paid in the US. The IFA expects nitrogen markets to remain relatively balanced with above-average demand growth anticipated between 2011 and 2015.
 
AMMONIA PRICES DRIVEN BY PRODUCTION CUTBACKS
Prices of ammonia spiralled in response to production cutbacks in Trinidad, strong US demand and extra requirements for
European buyers to cover forward commitments. Trinidad is the largest exporting country, and the reduction in supply, rather than booming demand, responsible for the tight market situation. Trinidad’s gas supply problems are expected to run beyond October, through to the year end, and with reduced availability from Yuzhny, due to maintenance turnarounds, buyers have paid higher prices for residual spot tonnage. Small volumes of Ukrainian product traded around U$640/t FOB (7 October) with available supply easily matched by demand. Baltic supply is tight and prices in the East also firmer with a new sale to Australia for November c.U$680/t Cfr. analysts expect prices to top U$700/t for November arrivals in the US and Europe, compared with US$415-U$420/t FOB last year.
The IFA expects global ammonia capacity to grow to 229.6mt by 2015, with 67 new plants under construction. The main additions to capacity would occur in Africa and Latin America, Asia (East,West and South) with China accounting for one-third of the new plants. Only ten new stand-alone operations will add supply in the global merchant ammonia market, with six dedicated to downstream products other than urea.
 
MOST OF THE NEW UREA CAPACITY TO OCCUR OUTSIDE CHINA
The IFA expects some 58 new plants to be commissioned (urea being the major driver in nitrogen growth), increasing capacity to 224.5mt urea by 2015. Most of the increase in capacity (41 plants) will occur outside China.While new capacity additions in China are expected to meet rising domestic demand, it will also
enable the closure of small, less efficient facilities, with fewer exports from China. The US and India are the major importers of urea, while countries in Asia, Latin America and Europe are expected to account for the majority of demand growth over the coming years. With reduced exports from China, new export supply will be added in the Middle East and North Africa to meet rising demand as well as in Asia (South, East and West), Latin America, EECA and Oceania.
 
DESPITE START-UP PROBLEMS AND REDUCED CHINESE EXPORTS, UREA PRICES DIP
Start-up delays for most of the new urea capacity for 2011 and reduced exports from China, the world’s largest exporter have tightened the global market for urea. And, while urea prices were expected to remain high to the end of the year — the market fell back following the turmoil in global markets — a weakened Euro hit nearby European demand prospects, while
US prices fell sharply with barges sold down to U$455/t FOB Gulf (7 October), below previous lows. A slight improvement is evident in the final quarter with physical barges trading in the low U$460/t to cover short positions with no fundamental upsurge in demand. While some analysts are negative for urea short-term, others suggest current lower prices will stimulate demand.
 
RECORD POTASH DEMAND DESPITE DELAYS IN CONCLUDING CONTRACTS WITH INDIA
Higher returns for key crops like, soyabeans, sugar and oil, aligned with large populations and expanding economies in Latin America and countries in Southeast Asia has driven crop production and with it demand for potash. Potash consumption in Asian countries (excluding China and India) has grown by nearly 80% over the past two decades. And, with no domestic potash production, the region’s rising demand is met by increasing imports. Typically, Canada has been the largest supplier of potash to this region, accounting for more than 40% of total imports. Demand has also strengthened in China with consumption expected to approach record levels, attributed to rising food production and the decision to cut stocks over the past few years with port inventory reported at just below 1mt. Like other countries, India has a pressing need to increase crop productivity and restock depleted inventories, but the delay in negotiating potash supply contracts for around 5.9mt for 2011/12, coupled with the limited availability of potash in the second half of 2011, is expected to constrain imports to 4–4.5mt this year, with significant volume expected to be shipped through the first quarter of 2012. North America is a relatively mature market for granular potash, shipments have been strong; the rapid maturity of the crop this year is expected to assist the fall application.
 
HIGHER PRICES REFLECT TIGHT GLOBAL POTASH SUPPLIES
Since the third quarter last year, spot prices in North America and Brazil have risen by approximately 50%, while the increases are significant, driven by strong demand, Potash Corp believes prices do not yet reflect the levels necessary to support long- term investment in greenfield potash capacity. Credit Suisse lifted expectations of price rises in 2011, helped by a lean supply chain and strong demand by Indian buyers, who held back until August, in the hope potash prices would fall. But as most of the global production is committed, with mines running at ‘full tilt’ and, with limited scope for new capacity to open over the next two to three years, is expected to keep the market tight with international potash prices likely to ‘close the gap’ on those announced for the US in the current quarter of U$590s/t up U$30s/t.
China’s potash industry association recently revealed that it plans to expand its potash production rapidly to 13.5mt by 2015, but the announcement was not taken seriously by other producers or analysts. Potash Corp saw the Chinese production at 4mt this year short of demand by around 11mt, and with domestic production limited, is expected to require imports over the longer-term. According to the IFA, near on 30 potash capacity expansions are being undertaken by existing producers with completion planned over the next four years. Global potash capacity is forecast to increase to 59.6mt K20 in 2015, up by almost 17mt K20, mostly in North America (largest supplying region) by 2015, followed by EECA, East Asia,West Asia and Latin America, with supply expected to increase to 52.3mt K20; while global potash demand is expected to grow by an overall 20% to 32.6mt K20.
 
PHOSPHORIC ACID CAPACITY TO INCREASE IN CHINA, SAUDI ARABIA AND MOROCCO
Global phosphoric acid capacity is forecast up to 57.6mt P205 in 2015, with 34 new acid plants planned over the period; 15 to be located in China, six in Morocco and three in Saudi Arabia — with over 90% of capacity dedicated to domestic downstream processing. Net addition to merchant grade acid capacity is estimated at 1mt P205, most of which will come from stand- alone units in Tunisia and Jordan. Global supply is projected at 47.8 P205 with demand to rise to 44.9 P205, leaving a small global phosphoric acid surplus of less than 3%, to expand moderately to 2.9mt P205 by 2015, following the large capacity projects planned in Morocco in 2014/15.
 
TIGHT MARKET BUT PRICES POTENTIALLY VULNERABLE POST 2012
The combination of strong demand, delayed expansion projects, plant closures and smaller exports from China, are expected to support tight market conditions for phosphate fertilizers in the near term. Rising supplies for both fertilizer types have been hit by delays to Saudi Arabia’s Ma’aden phosphate plant, which will
not reach full output until early 2012; and problems in the US, where Mosaic is expected to import phosphate rock next year if it cannot resolve an environmental dispute, that has shut capacity at its South Meade mine in Florida; the closure of this site is likely to keep the market tight and DAP price high.
With operating rates in 2012 projected at historically high levels, there is some uncertainty going forward, due to the impact, of rising input and phosphate prices, on phosphate production, demand in India and Pakistan and potential changes to tariff rates on NP exports from China. Beyond 2012, operating rates are expected to decline slightly as Ma’aden ramps-up to full annual capacity of 3mt DAP, one of the two main forms of phosphate used in fertilizers; and the new supply in Morocco is brought on stream.Although strong demand in a number of countries including India, Pakistan,Thailand and Vietnam are expected to take-up the majority of this new supply; but after the initial rise prompted by seeding periods, phosphate demand from large import regions, is expected to soften, with prices expected to decline.
 
WORLD DAP MARKET RELATIVELY TIGHT UNTIL 2014.
Over the next five years close to 40 new MAP, DAP and TSP units are planned to come on stream in Africa (Algeria, Morocco and Tunisia), West Asia (Saudi Arabia) Asia (Bangladesh, China, Indonesia and Vietnam), Latin America (Brazil and Venezuela) and EECA (Kazakhstan). Global capacity for the main processed phosphate fertilizers are projected to be 44.4mt P205 in 2015, representing a net increase of 7.8mt P205 over 2010. Expansion of DAP capacity would account for three quarters of this increase. The global DAP balance shows relatively tight market conditions from 2011 to 2013 with a potential surplus of less than 1mt DAP over this period. By 2014 the potential surplus may expand to 1.3mt.