Price index shows good news | July had lowest index cost in a decade
Fertilizer has been at its most affordable position in years this summer, and Mosaic says it looks like the trend will continue for a while.
Mosaic, a leading producer of potash and phosphate, has tracked plant nutrient affordability since 2005 through a ratio that compares fertilizer and crop prices.
The plant nutrient price index comprises urea, muriate of potash (MOP) and diammonium phosphate (DAP) prices weighted by the consumption of each ingredient in the United States.
The crop price index is an average of U.S. corn, soybean and wheat prices weighted by the share of bushels produced of each crop.
“(The ratio) gives you a sense of the relative cost of fertilizer compared to the value of the main crops produced,” said Michael Rahm, vice-president of strategic analysis with Mosaic.
“It’s not a perfect measure, but we think over time it gives you a pretty good idea of crop nutrient (affordability).”
Mosaic tracks the ratio weekly and publishes the results on its website. In early July it hit its lowest level in eight years but has crept up the past two weeks as grain and oilseed prices fell. The ratio was 0.68 for the week ending July 26 but was as low as 0.50 in the week ending July 12, the lowest level since May 2004.
Since May 2004 the highest the ratio climbed was 1.6 in October 2008.
The ratio’s long-term average is 0.84 and Mosaic expects weekly readings will remain below that because fertilizer prices are weak. Grain prices would have to fall a further 18 percent for the ratio to rise to the 0.84 average.
“Our expectation is that (ratio) will continue to show very good affordability for farmers,” said Rahm.
Potash and phosphate prices have fallen largely in response to a significant decrease in government subsidies for those two products in India, which is a key market for the fertilizers.
India imported eight million tonnes of phosphate and 6.5 million tonnes of potash three years ago. Those levels will likely fall to five million tonnes of phosphate and four million tonnes of potash in 2013.
Potash and phosphate prices have nearly tripled in India over the past 18 to 24 months. Meanwhile, urea subsidies have remained in place, keeping it extremely cheap. It retails for about $110 per tonne.
Indian growers have responded by applying more urea to their fields and less potash and phosphate.
Rahm said that is unsustainable. The Indian government will eventually have to reduce the urea subsidy and boost the potash and phosphate subsidies. However, that could take one to three years.
Another key factor pushing down prices is increased potash and phosphate production in China, Saudi Arabia, Russia and Canada.
“Some of that additional supply is coming onto the market at the same time we’ve seen some slack demand in a key country like India,” he said.
It’s a similar story for urea, where China has been ramping up production. China has exported 1.3 million tonnes of urea this year, up one million tonnes from the same time last year.
Fertilizer manufacturers are also experiencing reduced feedstock costs because of falling prices of key inputs such as natural gas, sulfur and ammonia. Some of those savings are being passed along to consumers.
Mosaic president Jim Prokopanko doesn’t expect a rebound in fertilizer prices anytime soon.
“As our guidance makes clear, we do not expect a significant recovery in potash and phosphate prices in the near term,” he told investment analysts during a conference call announcing the company’s fourth quarter results.
“Over the medium and longer term we ultimately believe that economics will rule.”
Soft fertilizer prices will curtail future expansions. Nearly eight million tonnes of potash capacity expansions have been cancelled or deferred over the past year.
“We are confident that over the next year or two demand growth will ulti mately absorb the new supply,” said Prokopanko.
Potash Corp. president Bill Doyle is more optimistic about the timeline for demand recovery.
“We continue to anticipate that global potash demand for 2013 could approach the previous record level of approximately 56 million tonnes, even with a weak Indian market,” he told analysts during a presentation on the company’s second quarter results.
Doyle said potash demand has been flat for almost six years, a hangover from the global recession. However, that is about to turn around.
“We think this is the first growth year over the next four to five years,” he said.
Potash use would be up 3.5 percent this year if not for poor sales in India. Doyle believes the situation in India could improve with an election scheduled for next year.
Current agronomic practices are not sustainable because yields remain low and the nutritional quality of the grain is suffering.