It is a good time to be a fertilizer producer.
Potash Corp. of Saskatchewan and Agrium, major fertilizer manufacturers, recently increased their profit estimates for the second half of this year. Their share prices are soaring.
The reason is a combination of strong demand, industry consolidation and the ability to pass on higher natural gas costs.
The International Fertilizer Industry Association says that following the run up in grain prices this spring, world fertilizer consumption is expected to grow by a strong 2.9 percent this year, after growth of 2.3 percent last year.
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In a five-year perspective from 2003-04 to 2008-09, fertilizer demand is forecast to grow on average by 2.1 percent per year, the association said.
The strongest growth over the forecast period is expected in Eastern Europe and the former Soviet Union, India, China and South America, areas of growing agriculturalimportance.
The nutrient expected to see the greatest growth in global consumption is potash, climbing by 10.4 percent by 2008, compared to 2004.
That’s good news for Potash Corp. and for Saskatchewan, a leading world producer, and it’s not overly bad news for prairie farmers whose potash needs are modest.
Phosphate demand is expected to grow by 9.8 percent and nitrogen by 8.7 percent.
Based on planned fertilizer production increases, the association sees growing surpluses of world nitrogen production, a modest increase in phosphate surplus and a decline in potash surplus.
The bad news for prairie farmers is that those new nitrogen plants are being built in conjunction with new low-cost natural gas developments outside of North America.
In North America, high natural gas costs during the last few years caused 15 production facilities to close, representing 22 percent of U.S. capacity. Other facilities cut back. With surplus North American capacity almost eliminated, companies were able to raise the price of nitrogen enough to make up for the higher cost of natural gas, which accounts for about 90 percent of the raw cost of manufacturing ammonia, the key building block of nitrogen fertilizer products.
But natural gas prices are again climbing. November futures prices on the New York Mercantile Exchange climbed 17 percent in two days last week.
The amount of natural gas in storage in the U.S. is healthy going into winter, but American production is down from last year because output from old producing fields is declining and new wells have less potential production.
Nitrogen prices in the coming months will depend on winter weather, home heating demand and industrial activity. But it is a good bet the trend will be up.
Fertilizer manufacturers hedge natural gas prices to protect against price spikes, but they can’t fully insulate themselves from steadily rising gas prices.
That means Canadian farmers will probably face higher nitrogen costs next spring.
That makes pulse crops, which produce their own nitrogen, more attractive, but there is a limit to how much growers can produce before flooding the market and driving down the price.
