Will fertilizer prices continue to fall?

PotashCorp thinks widening crop-fertilizer value gap will lift nutrient prices but a private analyst disagrees

Some of the major players in the fertilizer business believe prices are headed higher in the second half of 2016 but an industry analyst disagrees.

Price direction was a hot topic during quarterly results conference calls for a number of manufacturers.

PotashCorp, the world’s largest fertilizer company, showed investment analysts a chart highlighting the widening gap between the crop price index and the fertilizer price index.

The crop price index line has been fairly flat since January 2015, while the fertilizer price index line has been on a steady decline, creating good value for farmers.

When the gap gets as wide as it is today it typically starts to narrow by either crop prices falling or fertilizer prices rising, said Stephen Dowdle, president of PCS sales.

He said the wide gap is supporting fertilizer demand, which will lead to a firming in fertilizer prices.

The other factor behind the forecast for strengthening fertilizer prices is the slowdown in Chinese urea exports due to “very robust” domestic demand for the product in China that has lead to higher domestic prices than export prices.

“There are some folks that are forecasting total urea exports in 2016 down to levels of about eight to nine million tonnes. This is down from almost 14 million tonnes in 2015,” said Dowdle.

“So that is certainly painting a scenario in the second half where you could see a little firmer urea prices. You see in the last tender in India the participation from the Chinese urea producers was very subdued.”

Mosaic Co. had a similar outlook. President James O’Rourke said the company expects a strong second half of the year due to rising fertilizer demand.

“The recent run-up in agricultural commodity prices, combined with current nutrient prices, make our products very affordable,” he said.

“In fact, crop nutrients are more affordable today than they have been during the last five years. This gives us confidence in the second half outlook.”

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He expects solid demand out of Brazil despite the political and economic turmoil in that country and from India due to forecasts for a return to normal monsoon rains. Meanwhile, the U.S. Department of Agriculture expects farmers will plant 93.6 million acres of corn, which would be the third biggest corn area in U.S. history.

Mike Rahm, vice-president of market and strategic analysis with Mosaic, said falling raw material costs have contributed to lower fertilizer prices but those costs are starting to stabilize.

He also highlighted currency changes and a lucrative Indian subsidy for fertilizer purchases as factors that could pressure prices higher.

“There is the potential there for lots of things combining to provide some uplift in prices (in the) second half,” said Rahm.

Agrium offered up a contrary view of where prices are heading. President Charles Magro said he expects urea prices to drop after the spring season.

“We don’t think it’s going to go below the Chinese cost of production for any sustained period of time,” he said.

“You’ll see some slightly lowering prices. It will probably stay at the cost curve for a period of time. It won’t slip significantly below that.”

David Asbridge, president of NPK Advisory Service, believes Agrium’s outlook is the right one.

He agreed with PotashCorp that the gap between crop and fertilizer prices will narrow but that will happen by crop prices falling, not fertilizer prices rising.

Asbridge said U.S. farmers are planting big corn and soybean acres and if summer weather is good, big crops will be harvested.

“I’m really pretty pessimistic on crop prices going forward,” he said in an interview.

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Meanwhile, a wet spring prevented some growers from applying phosphate and potash fertilizers. Phosphate prices have already turned lower.

“I’m not really optimistic that fertilizer prices are going to be able to perk up much,” he said.

Asbridge thinks Chinese urea demand will nor be as strong as PotashCorp’s forecast because the government recently stopped subsidizing corn prices. China has estimated the its seeded corn area will fall by almost 3.3 million acres, the first drop in 13 years.

Another analyst on the mentioned on the PotashCorp conference call that China recently announced a policy to hold fertilizer consumption at one percent gains per year through the end of the decade.

Jochen Tilk, president of PotashCorp, believes the new policy is aimed at nitrogen and phosphate consumption, not potash consumption. And he questioned how the policy would be implemented.

“I don’t think it practically can be enforced because when you look at farming and the application of nutrients it’s pretty hard to (prevent) a farmer from applying,” he said.

Asbridge doubts China will curtail urea exports by the 5.5 million tonnes PotashCorp is forecasting.

He thinks the drop will be closer to 1.5 million tonnes because China has bolstered its subsidy program for nitrogen fertilizer production and the currency has been devalued making Chinese exports even more competitive.

Asbridge is forecasting urea prices in the U.S. Midwest will drop to US$240 per tonne by mid-summer, down from $270 per tonne today.

Prices typically regain summer losses in the fall but he doubts urea prices will fully recover this fall due to the global glut of the nutrient.

Asbridge expects a similar price pattern to evolve in Western Canada during the summer and fall.

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