Rabobank’s Food & Agribusiness Research and Advisory Group, expect farmers to take advantage of higher prices and ramp-up plantings for the 2013 crop, to compensate for the dismal harvest and dwindling global grain reserves. This is a view supported by Dow Chemical, which became the second US chemicals conglomerate to report agriculture as one of the few highlights of a poor operational picture, which is forcing hundreds of job cuts. The US chemicals group, said that its agricultural sciences division achieved an 8% rise, to $1.30bn, in sales for the (Jul–Sep) quarter boosted by solid industry fundamentals. Elevated farm income levels providing strong incentive for farmers to maximize yields, as they reported a particular increase in sales of seeds up by 21%, while sales of agrichemicals rose 6%, driven by significant volume and sales gains in Latin America, forecast to significantly increase sowings to exploit high crop prices.
PRICES MOVEMENT REMAINS MIXED ACROSS THE FERTILIZER SECTOR
While the sharp cut in global grain supplies and tight global inventories are expected to stimulate global fertilizer demand, price movements across the fertilizer complex at the start of the (Oct–Dec) quarter are mixed. Global urea prices 10–13% softer than in the previous quarter, and even with cut-backs lack of demand for potash and phosphate is evident and all global nutrient prices remain well short of the historic highs witnessed in 2008. China’s low export tax window for phosphate combined with production cutbacks in some regions kept markets relatively balanced. Following the severe drought, which affected large swathes of the Midwest, US fertilizer demand is expected to rise as a result of better returns from crops, through higher grain prices and insurance payments, which will be a key factor in autumn/spring application windows. Some analysts believe that despite record prices some farmers may opt to skimp on crop nutrients because low yields and the interrupted growing season may have left phosphate and potash fertilizer in the ground. Based on overall market fundamentals, Rabobank forecast global fertilizer prices will remain relatively steady through to the end of the year, but with some upside potential.
WEATHER-RELATED ISSUES IN LATIN AMERICA CONTINUE TO PLAGUE 2012 HARVEST
While the planted area for wheat and coarse grains rose by almost 1m/ha, drought and other weather related issues in several of the world’s key agricultural regions severely impacted this year’s corn, soyabean and wheat crops — the USDA’s provisional forecast for 2012 harvest is 2.2Bn/t, a huge 82mt below last year, with all crops expected to be subject to further downward revision. Hope that Latin America would produce a bumper corn crop, to ease pressure on supplies and prices, have been upset. Persistent hail, rain, waterlogging and flooding, has landed much of Argentina and southern Brazil with excessive rain, while leaving many central and northern parts of Brazil with too little moisture. Argentine corn sowings were said to be 38% complete, some 20 points behind last year, with the slow rate of seeding becoming a big issue. While some analysts suggest it is too early to make meaningful projections, Buenos Aires-based economist and agricultural consultant Manuel Alvarado Ledesma, expects Argentine’s corn crop to drop from an anticipated 28mt to 22mt.
Brazil and Argentina, were also expected to produce record soyabean crops, but recently Michael Cordonnier, of Crop Advisor, trimmed his forecast for Brazil to 80mt, from 81–83mt; while Oil World cautioned, “...there is now a higher risk that initial estimates of a sharp increase in South American soyabean production will not fully materialize.” Lower global output of cereals and oilseeds, even with a fall in consumption, is forecast to outstrip supply taking thin global stocks, especially corn to historic lows. In the US, the largest corn consuming country, stocks have tightened further with the corn stocks-to-use ratio expected to fall below 6%.
WHEAT, CORN AND SOYABEAN PLANTINGS FORECAST TO INCREASE IN 2013/14
Early indications suggest winter wheat planting in the northern hemisphere is already well advanced under generally favourable weather conditions-some concerns have been flagged in North America and in the Volga River area in Russia, where persistent dryness resulting in a lower planted area/ poorly established crop. Elsewhere Russian farmers are said to have raised sowings of winter crops to 16.8m/ha, while spending more on inputs, seed and fertilizer. The willingness to invest reflects the greater returns on crops that growers are receiving, given Russia’s decision to avoid imposing a ban on exports, which has helped to keep domestic prices exposed to higher prices on the international market. The International Grains Council forecast the global wheat area 2% higher for 2013/14, driven by rising futures and firm cash prices and a projected recovery from the weather-related damage to crops (CBOT Wheat Dec $8.67/bu – 31 Oct).
US growers are forecast to plant 80m/acres to soyabeans and 97.5m/acres to corn in 2013, higher than last year and the largest corn acreage in 75 years. High corn futures prices and firm cash prices have driven corn area expansion in the US and in competitor countries like Brazil,Argentina and Ukraine. With corn and soyabean prices rising on reports of extreme weather conditions, expected to significantly cut output in South America, and also China’s soyabean crop now thought to be below 10mt, and likely to increase soyabean imports by 5mt to 65mt in 2012/13. The additional uncertainty next spring about the availability of specific seed types, acreage, feedlot placements, the export pace and ethanol policy heightens the pressure on buyers to extend coverage before next spring. Corn futures CBOT Corn Dec 12 – $7.46 (Oct 31), and soyabean prices strengthened CBOT Soyabean 13 Jan – $15.426/bu (31 Oct).
IMPROVING NITROGEN DEMAND TO ABSORB INCREASED SUPPLYThe current low-cost environment resulting from the boom in shale gas that led to a historic fall in US gas prices has been of great value to the nitrogen sector and to companies like Agrium, who derive 50% of its income from the nitrogen sector. Since last year the share prices in Agrium rose to NYSE $105.69 – 31 Oct ($67.55). The International Fertilizer Association (IFA) forecast global nitrogen capacity to expand by 17–25%, with improving demand to absorb short-term increases in supply.
AMMONIA PRICES DRIVEN BY PRODUCTION CUT-BACKSPrices of ammonia firmed in September $630–650/t in response to gas production cut-backs in Trinidad (down by around 25%), reduced supply of ammonia from Iran due to international trade sanctions and lack of vessel insurance further curtailing exports. While DAP (diammonium phosphate) producers have been strong buyers of ammonia, muted demand for their product this year in Southeast Asia and limited interest in South America. US domestic ammonia prices were flat at NOLA through September but firmed at interior terminals with prices up from $780 to $790/t. But little activity was evident, late October, in UAN and ammonia and prices were flat. Internationally, one sale in the Black Sea showed continued strength in world ammonia values. The IFA forecast, global ammonia capacity could increase by 17% to 230.4mt NH3 in 2016, suggesting a surplus of 16mt N by 2016, but delays and slower growth would cut the surplus to 10mt roughly 6% of potential supply.
UREA PRICES FALL ON LACK OF INTEREST IN KEY AREASThe sharp price run-up for prilled urea, has given way to limited interest in all major areas — FSU prices have stalled with buyers reluctant to consider offers near $400/t FOB (free on board) Black Sea/Baltic. While small deals have been concluded at $402-405/t FOB Yuzhny for top-off tonnage, larger tonnage will be significantly lower. Current prices are said to be too expensive in Asia, while India’s next tender (31 Oct) is expected to be dominated by Chinese and Iranian urea, at prices well below $390/t FOB for Black Sea origin.
Chinese granular urea sold for Oct/Nov shipment at $411/t FOB but, suppliers are seeking much higher levels for future movement from bonded store. In the West granular prices are largely flat. Egypt’s latest sales tender resulted in just a small sale of 6,000/t at $462/t FOB.
The important US market has drifted lower as urea imports pile up at the Gulf. With soft urea prices, buyers are not prepared to move large volumes with the spring season months away, and lower traded values evident for Nov $410–413/st FOB, Dec $420/st FOB and Jan $425/st FOB. In Brazil many observers have flagged port hold-ups and improved working conditions for truck drivers, as hampering fertilizer trade, while buyers remain ever cautious over likely price developments. In the UK demand remains slow due to a rain-soaked autumn sowing period.
Yara International confirmed that urea prices at an average of $383/t were down 21% year-on-year, but flagged supportive factors to the market from setbacks to fresh global manufacturing capacity in Egypt and Algeria in particular. While global capacity was set to rise by 2.6% in 2013, ahead of annual growth in demand, which averages 2.1%, further capacity delays are evident compared with these estimates. Overall, projects due for 2012 and 2013 completion remain behind schedule. And while several new plants are being planned in North America, for completion in 2015 and beyond, most of these projects are at an early stage with significant uncertainty linked to financing and permit hurdles.
Over the next five years, the IFA forecasts global urea demand for all uses to grow by 2.4% per annum to 176mt, with market moving from relatively tight, to a growing surplus over 19mt by 2015/2016, with much of this increase reflected in the massive capacity addition, that is planned in India in 2015/16; although the forecast, recognizes the potential for much slower growth, which would cut the potential surplus to 12mt.
FLAT PRICING AND LACK OF DEMAND INCREASE POTASH STOCKS
Despite higher returns from key crops, flat pricing and lack of demand have added to potash stockpiles that were already higher than normal. PotashCorp, the world’s biggest fertilizer company reported disappointing third-quarter results blamed on delays in signing new supply contracts with China and India — two of its most important offshore customers, and led to a drop in share values (NYSE $40.31 – 31 Oct), despite record sales to the North American market over the same period of 1mt, as post-drought, farmers address soil nutrient requirements. Elsewhere, sales to the world’s top potash importing countries- China accounted for only 12%, India 5%, where new supply contracts are not expected until late December/early January; other Asian countries accounted for 41% and Latin America 32%. In the first nine months of 2012, Canpotex (the sales arm for PotashCorp,Agrium Inc and Mosaic Co) shipped 5.9mt of potash, some 20% down year-on-year.
PLANT CLOSURES TO HELP BALANCE SUPPLYEven with higher crop prices providing farmers with plenty of motivation to increase fertilizer applications, and strong US and Latin American potash shipments, the potash market remains soft and relatively slow. Russian producer Uralkali Belarussian Potash opted for plant closures as did PotashCorp with Rocanville and Lanigan mines in Saskatchewan to be closed for eight weeks, as the industry grapples with large supplies. While the closure removes about 1mt, it follows previous cuts in production that removed about 2.1mt. PotashCorp continues to bet on much higher demand in the future, and is investing in massive production expansion that will take its capacity to 17.1mt by 2015, in sharp contrast to the company’s current production cut-backs. But according to the company’s CEO, Bill Doyle, this is not a new phenomenon, ‘...growth has often occurred in uneven waves, with increases in demand sometimes punctuated by periods of contraction...’
While discussions with China are on-going, shipments are expected to resume by the end of the year. China was said to have met its recent potash needs through a mix of domestic production, stock draw-downs and rail deliveries from Belarus, but unlikely to rely solely on these sources long-term. The need to boost stocks in the future may even lead, to increased sales to this market in 2013. By contrast, the outlook for renewing the Indian contract is more complex — PotashCorp says the Indian government has a fertilizer subsidy program that favours nitrogen over potash, which has created price distortions in the market, encouraging farmers to apply too little potash. The cut in fertilizer subsidy by the Indian government, combined with an inflated rupee has left many Indian farmers unwilling to pay higher prices for potash. While PotashCorp has cut its estimate for potash shipments in 2012 to 7.6–8.3mt, it remains upbeat on the long-term prospects. Overall, global potash shipments are expected to fall by 2mt to 53mt in 2012. Both Mosaic and PotashCorp see a rise in potash purchases from Indian and Chinese buyers by end year or early in 2013 at prices c. $420/t and $450/t.
According to the IFA, despite slippage of 6–18 months for some projects, near 40 potash projects are expected to come on stream by 2016, increasing capacity by over 15mt K20 to 61.4mt K20, mostly in North America (largest supplying region), Eastern Europe and Central Asia; supplies are expected to grow by 37% to 52.8 mt K20, while demand is forecast to increase by 3% per annum to 36.6 mt K20.
PHOSPHORIC ACID CAPACITY TO INCREASE IN CHINA, MOROCCO AND BRAZIL
While large phosphate rock supply emerging in Africa and East Asia in the near term expected to grow by 43mt to 256mt in 2016. Rock phosphate prices have stabilized in recent months after some volatility mid-year, but prices have grown steadily from May–September to $185/t. Phosphoric acid capacity will increase in China, Morocco and Brazil, with global capacity growing by 4% per annum to 61.3mt P205 in 2016. Global
supply is projected at 49.8mt P205 with demand to rise to 46.2mt P205, leaving a small global phosphoric acid surplus of 3.6mt P205. Should projects be delayed this surplus would fall to 2–2.5mt P205 2012–2016.
INDIAN DAP SALES HIT BY GROWER PREFERENCE FOR UREAGlobal capacity of the main processed phosphate fertilizers would reach 47.6mt P205 in 2016. Large capacity increases will occur in China, Morocco and Brazil. Mosaic’s North American phosphate output dropped 9.1% to 2mt while sales were 16 percent lower at 2.7mt. With limited interest in sales of DAP in South America and lack of sales to India, where relatively higher prices of more complex P&K fertilizers have been cut as farmers opt for lower cost urea. Poor third quarter results were reflected in a dip in Mosaic’s share price on the NYSE $52.37 – 31 Oct ($55.20 – Oct 11). Jim Prokopanko Mosaic’s CEO, expects the market for phosphates, to continue to be “tight” but looks to an improvement in product sales as the season progresses. Phosphate prices nearby were unchanged with barges around $545/FOB NOLA (19 Oct), with more pronounced down-side pressure on the market, with DAP offers for 13 Jan said to be under $500/t FOB NOLA.
Nutritional security vital to India’s future
The importance of agriculture to the Indian economy will be understood from its nearly 15% share of gross domestic product and the sector providing employment to close to 60% of the population, writes Kunal Bose.The country has got about 128m hectares under foodgrains, 28m hectares under oilseeds, 5.2m hectares under sugar cane and 12m hectares under cotton, jute and mesta. All these besides, India — the world’s second largest producer of tea after China — has got vast tracts of land under plantation crops, including coffee, rubber and the whole range of spices. Food security for over a billion people is a challenge, calling for the agriculture sector growing at least 4% annually. This, however, is not happening most of the times. In fact in 2008–08, the farm growth rate fell into negative zone of –0.1%. No wonder the government is keen to create conditions for the launch of a second green revolution which, apart from cereals, should also touch oilseeds, pulses and fruits and vegetables. Being a leading emerging nation, it is time India started talking seriously about nutritional security.
The challenge is multi-dimensional and the next breakthrough in farm production will depend much on India’s capacity to use fertilizers in right quantity and maintain at the same time a
correct balance in application of nutrients like nitrogen, phosphate and potash (NPK). To get the best results from use of fertilizers, it is absolutely essential to very substantially raise the irrigation potential from the present about 110m hectares. Many farmers engaged in growing oilseeds in marginal lands complain of major setbacks in production in a bad monsoon year and investments in fertilizers go waste, they being denied the benefit of irrigation. According to the government’s latest Economic Survey, only a little over a quarter of land under oilseeds has irrigation support.
Feedstock shortages like natural gas, notwithstanding recent discoveries of
Krishna-Godavari gas, is standing in the way of Indian fertilizer capacity expansion through brownfield and greenfield routes. While India already has a fairly large production base for ammonia-urea, it does not have much to show for phosphate and potash since raw materials for such nutrients are not locally available. The Economic Survey says,“India is meeting 85% of its urea requirements through indigenous production. But it depends heavily on imports for its phosphatic and potash fertilizer requirements.” Depending on land under various crops and nutrient requirements of land during a crop year, India will be importing annually over 6mt (million) tonnes of urea and diammonium phosphate (DAP) each and over 5.5mt of muriate of potash. Even after domestic production of over 21.5mt of urea, 4m tonnes of DAP and 9.2mt of complex fertilizers supplemented by imports, the Indian per hectare consumption of fertilizers in nutrient terms remains less than 150kg per hectare. This not only compares rather poorly with countries where farm productivity is high but fertilizer use here is tilted much in favour of urea.
Agriculture economist Suresh Srivastava says,“we are living in times of globalization and India is in the forefront of free trade and cross border investment campaign. The country has shortages of raw materials needed to make fertilizers.At the same time, Indian groups have rich experience in building and running fertilizer complexes over decades. This should be leveraged to create offshore capacity where natural gas and other raw materials are available aplenty.” Some Indian fertilizer producers have already built plants in the Middle East and Africa and also acquired mines for sourcing phosphate and potash, in partnership with local groups. A more successful such venture is Oman India Fertiliser Co which is half owned by Oman Oil Company and the balance in equal proportion by two Indian cooperatives IFFCO and Kribhco. It is no brainer that it is much easier to import urea than gas. This will explain why more and more Indian fertilizer companies are keen to build capacity abroad.
India has now set its eyes on Mozambique, which has discovered huge gas reserves totalling an estimated 100 trillion cubic feet showing potential to emerge as the world’s fourth gas rich country after Russia, Iran and Qatar. New Delhi is holding proposals to build fertilizer plants in Mozambique provided it gets gas allotment at concessional rates. Rashtriya Chemicals & Fertilisers, an Indian group, will be keen to build a complex with capacity of 1.2mt of urea and 650,000 tonnes of phosphate. The project calls for an investment of $2bn. India is awaiting a reply from Mozambique asking for an indicative price for gas for it to decide investments in downstream projects, including fertilizers and petrochemical projects.
As India makes the bid in Mozambique, it is aware how well entrenched China is in Africa, leaving the US and Europe well behind in acquiring resources. At the same time, Indian peregrination, stoked by the need to own capacity abroad and thereby not play in the hands of international trading houses has led IFFCO to plan develop a 1.2mt urea plant in partnership
with a Canadian agriculture co-operative. The plant is to be commissioned by 2017.
Though no formal announcements have been made, it is understood that some Indian groups are scouting for medium- sized potash deposits in Canada for development into mines. India has no potash deposits but it has growing requirements of potash. China and India are among the world’s largest importers of potash from Canada and both are now facing major procurement issues. The two countries buy the nutrient through contracts that are generally renewed annually. Annual contract prices are then taken as benchmark for spot sales. The US and Brazil mostly buy their requirements in the spot market. Indian importers are piqued that Canadian producers hand in glove with trading houses have set potash prices too high forcing them as also Chinese importers to postpone buying at least till December. It is a case of hiking prices because of strong demand.
“You can’t have it both ways — high demand leading to high prices. We are, therefore, seeing demand destruction,” says an observer. Neither China — which is sitting on comfortable reserves from which the nutrient is drawn in the absence of imports — nor India, which will have a fair idea of its requirements once the crop growing season wraps up in December, is in a tearing hurry to enter the world market for potash.
The fall out of absence of China and India as buyers is Potash Corporation of Canada temporarily shutting down two mines Lanigan with capacity of 3.3mt and 2.7mt Rocanville in Saskatchewan. An Indian official makes it clear that “we will need to pay significantly less than the $490 a tonne we paid for the last contract. Demand for potash in India has turned soft because of combination of high import prices, a weak rupee and a cut in fertilizer subsidy.” The message for China and India is they should go all out to buy potash deposits wherever these are available.
Growing soya and sugar demand behind demand for fertilizer in Brazil
Fast-growing demand for soya and sugar, amongst other crops, is pushing up demand for fertilizer in Brazil, 70% of which is still imported, writes Patrick Knight.
The 22.5mt (million tonnes) of fertilizer Brazil will import this year, will cost close to US $10 billion, twice the US $4.9 billion the 15mt imported in 2010 cost.
The strong demand is explained largely by the enthusiasm of farmers planting soya, who buy 44% of all the fertilizer used in Brazil and who have planted an extra two million hectares to the crop this year, 8% more as in 2011.
With the world population growing fast and demand for food increasing considerably faster, about 6% more fertilizer has been used in Brazil each year in recent times. Seventy per cent of it is imported.
A record 4mt more was used in 2010 than in 2009, an increase of 16%.
With domestic production now hardly growing, more than 5mt more fertilizer had to be imported last year than the 15.3mt of 2010, an increase of more than 35%. About 5% more was needed this year than last as well.
Led by the Vale mining company, fertilizer companies in Brazil, the world’s fourth-largest market for fertilizer after China, India and the United States, plan to spend close to US $20 billion dollars between now and 2017 on raising production.
A top priority will be to produce more potassium, of which 90% of the 4mt used each year is now imported, as well as of phosphates, of which close to 50% of what is used comes from abroad.
Vale, which paid $5 billions for the assets of the Bunge company in fertilizer three years ago, will be responsible for most of the new investments.
The goal is for about 60% of what is used in Brazil to be produced there, rather than less than 30% as is now the case.
Whether this will actually be achieved is another matter. It takes at least six years to bring a new mine on stream, while the fast-growing demand for grains means much more will be needed each year from now on.
Vale, part way through developing a large potassium mine in Argentina — which, if all goes well, will start producing 3.4mt in 2014, most to be exported to Brazil — had a nasty shock early this year.
The increasingly nationalist government in Argentina took back into state control the YPF oil company, bought by Spain’s Repsol a few years ago. Repsol had recently announced the discovery of one of the world’s largest reserves of oil-bearing shale there.
Upsetting Spain is one thing, but to offend Brazil, Argentina’s largest trading partner, is another matter. Brazil now supplies increasing amounts of electricity, as well as crude oil to Argentina, both in short supply there because of a lack of investment.
After due deliberation and with assurances from the Argentine government, which also promised not to interfere with Brazil’s oil company Petrobras — which has important interests in the country — Vale decided to continue with the $6 billion investment there.
As well as opening the large mine, a new terminal is to be built at Bahia Blanca port.
Three-hundred-and-fifty kilometres of new rail track will be laid and a further 400km of line upgraded.
There is concern that the Argentine government, increasingly dependent on taxes on the export of commodities such as maize, wheat and soya, might later raise taxes on the export of the potassium, for which Brazil will have to pay the world price.
After years of negotiation,Vale has finally agreed new terms for further development at the only potassium mine in Brazil itself. The existing concession Vale has with state oil company Petrobras, which owns the mine, runs out in 2014.
This potassium is found close to large reserves of crude oil which Petrobras wants to develop. Some engineers at Petrobras, which uses natural gas to make most of the nitrates produced in Brazil, wanted the company to take over running the mine, which is in Sergipe state.
But president Dilma Rousseff intervened and a new contract, aimed at increasing production from the present 700,000 tonnes a year, to 1.2mt, has now been signed.
Whatever happens, it will be some time before Brazil becomes anywhere near self-sufficient in potassium and phosphates, as it takes six or seven years between the decision to open a new mine being made and production starting.
A rule of thumb is that to produce one additional million
tonnes of fertilizer, US $1.6 billion has to be invested. In the meantime, Brazilian ports, notably Paranagua and
Santos through which most of the 20mt plus fertilizer imported each year now arrives, are having difficulty coping with the huge increase in imports.
The difficulties involved in getting the fertilizer from ports to the farms where it is needed, many up to 2,000km away, are also getting worse.
In the middle of this year, 47 ships were either waiting to unload fertilizer at Paranagua, which handled 9mt last year, or were expected to arrive shortly.
Paranagua has sufficient storage capacity to hold about 2.5mt of fertilizer. But this was full to overflowing early this year, despite importers having to pay $1 per tonne per day to keep it there.
The trucks and trains which bring the soya, maize and sugar from farms and mills in the interior to Santos and Paranagua, carry mostly fertilizer as a return cargo.
However, freight rates have risen by up to 40% this year, while new restrictions on how long truck drivers can remain at the wheel, will push up costs further.
Although soya, maize, cotton and sugar cane account for 80% of all the fertilizer now used in Brazil, ranchers are under pressure to increase the number of cattle which now graze on a hectare of land, so are buying more fertilizer as well.
Farmers wanting to plant more soya and sugar cane, are pressing ranchers to sell them their land. So to push up yields and revenues as well, ranchers are using more fertilizer on their pastures.
The world price of fertilizer has increased sharply in the past few years, as existing producers struggle to keep pace with the growing demand. But the current high prices have attracted considerable new investment and 250 new plants are now being built around the world. This could result in prices falling from 2015 on.
Investors are turning their attention to Brazil, notably because very large reserves of potassium have been found underground close to the Amazon river.
Relatively little of Brazil’s huge territory has been properly surveyed for minerals. So, as time passes, Brazil can be expected if not to become entirely self sufficient in fertilizer, at least to keep pace with the huge growth in the output of soya and other crops.