Why Have Crop Nutrient Prices Increased So Much?

This is one of the first questions that farmers are asking their crop input suppliers this spring. Crop nutrient prices, indeed, have increased sharply during the last 12 months. For example, current spot prices of anhydrous ammonia, diammonium phosphate (DAP) and muriate of potash at Midwest wholesale terminals have increased about 75%, 200% and 160%, respectively, since January 2007.

Price moves of these magnitudes typically are the result not of a single fundamental driver but rather a combination of demand-pull and cost-push forces. The fact that crop nutrient markets are global means that a wide array of factors ranging from policies to fight inflation in China to weather developments in the Southern Hemisphere impact the price that a Minnesota wheat grower or an Indian farmer pays for nitrogen, phosphate or potash.

In the case of crop nutrients, the combination of an extraordinary surge in demand, an industry not equipped to meet such a surge and large jumps in energy and raw materials costs has propelled prices of key fertilizer products into uncharted territory.  Let’s take a look at each of these factors.

Extraordinary Nutrient Demand Growth -- First, the pace of global demand growth has more than doubled. The latest estimates from the International Fertilizer Industry Association (IFA) indicate that world nutrient use will increase 13% or about 20 million tonnes during the three year period from 2006 through 2008.  That is a compound annual growth rate of 4.0% and it is more than double the rate of 1.8% from 1995 to 2005. The 20 million tonne increase in global nutrient use is roughly the equivalent of adding another United States to world demand in just three years.

Record prices for a wide array of agricultural commodities and positive farm economics in most regions of the world underpin this extraordinary demand outlook. At the end of February, the 2008 new crop prices for corn, soybeans and hard red spring wheat were trading at roughly $5.65, $14.25, and $11.30 per bushel, respectively.

But it’s not just a corn-soybean-wheat game. The nearby contract for rough rice on the Chicago Board of Trade was trading at a record level of about $17.30 per cwt and the nearby contract for palm oil on the Kuala Lumpur exchange was trading at a record high of about 3,825 ringgits per tonne or 54 cents per lb at the end of February.

Markets are asking farmers around the globe to step on the accelerator and rev up the powerful engines of production agriculture in order to meet faster growth in grain and oilseed demand.  That, in turn, is speeding up nutrient demand growth worldwide.

An Industry Not Equipped to Meet a Demand Surge -- Second, the crop nutrient industry was not equipped to meet a demand surge of this magnitude. Crop nutrient producers battled rising energy costs and other margin pressures earlier this decade, resulting in under-investment at best and permanent plant closures at worst.

For example, almost two dozen U.S. nitrogen plants closed during the past 10 years due to the increases in domestic natural gas prices, lackluster demand and the development of new capacity in regions with lower cost gas. U.S. gross ammonia production today is down about 40 percent from its peak 10 years earlier.

U.S. phosphate rock production also has declined more than 30% from its peak in 1996.  Phosphate rock is the mineral used to produce phosphate fertilizer.  No new phosphate rock mine has been developed in the United States since 1995 as a result of low profitability as well as increasingly stringent and costly mine permitting requirements at the federal, state and county levels of government.

A Sharp Escalation in Crop Nutrient Production Costs -- Finally, higher energy and raw materials prices are driving up production costs to record levels. The production and distribution of crop nutrients are energy intensive so the sharp increases in petroleum and natural gas prices have pushed up the cost of crop nutrients to farmers worldwide.  In particular, the synthesis of anhydrous ammonia requires large amounts of natural gas or another hydrocarbon both to fuel the process and to use as a feedstock. A typical U.S. nitrogen plant uses enough natural gas in one year to heat 128,000 homes in Minneapolis for an entire year!

In addition to energy, costs of key raw materials also have increased dramatically during the last year.  Sulphur, an important raw material for the production of phosphate fertilizer, is a prime example. The price of sulphur has increased by a factor of four to six at key pricing points during the past 12 months and sulphur shortages are reducing phosphate output in many parts of the world.

Where are Crop Nutrient Prices Headed From Here? -- Where crop nutrient prices head from here will hinge on a few key factors. The first is crop prices.  As long as crop prices remain at high levels and farm economics remain solid, nutrient demand will continue to grow at high rates.  Futures markets indicate that the rally in agricultural prices is not a one year phenomenon. For example, based on futures prices at the end of February a farmer could have sold his or her 2008, 2009 and 2010 corn crops in the $5.35 to $5.65 per bushel range.

The second is raw materials costs. Energy prices have increased again and sulphur prices continue to defy gravity. We anticipate no let up in cost pressures in the near term.

The third is China.  China now is a large exporter of nitrogen and phosphate and a large importer of potash.  We expect that China will export as much or more nitrogen (urea) this year as in 2007 and that along with the commissioning of a few new plants will help stabilize or possibly push down nitrogen prices from current levels.

China, however, is expected to export significantly less phosphate this year than a year ago.  Chinese exports of phosphate products soared from less than 1.9 million tonnes in 2006 to more than 5.0 million tonnes in 2007. Chinese producers supplied most of the growth in global phosphate demand last year, but likely shorted their domestic customers by as much as two million tonnes of product in the process.  Chinese planners are battling a serious inflation problem caused in part by large increases in food prices.  Planners clearly want to keep more phosphate at home in order to help farmers grow a record crop this year and have imposed a 35% export tax on all phosphate products through October 1.  Planners took more direct action recently and effectively banned phosphate exports during March and April.

Michael R. Rahm, VP, Market & Economic Analysis, The Mosaic Company, Plymouth, MN.