Investors warned that global fertilizer prices could collapse if China devalues its yuan
A devaluation of China’s currency would be devastating to fertilizer prices, says an industry analyst.
Ben Isaacson, analyst with Scotia Capital Inc., thinks investors need to be aware of the growing possibility that China will devalue the yuan.
“While the house may bet against it, we think the probability is much greater than just tail risk due to a near-empty monetary toolbox,” he said in a March 30 industry comment.
That would have a profound impact on fertilizer prices and Chinese demand for a variety of agricultural commodities.
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“Global urea, and indirectly UAN prices, would free fall instantly with ammonia largely following in sympathy,” said Isaacson.
The case for devaluation is that it would allow Chinese exporters to regain lost competitiveness, boosting growth and jobs in an economy that grew at its slowest rate in a quarter century last year.
There would be increased foreign direct investment and higher cost imports, which would reduce the risk of deflation.
There are also plenty of arguments against devaluation, topped by the higher cost of servicing $1 trillion in foreign debt. It would also undermine China’s goal of making the yuan a more internationally desired currency.
The deputy governor of the People’s Bank of China recently said China does not intend to devalue its currency, but Isaacson believes it could still happen, even though the odds are likely less than 50 percent.
If it does happen, growers can expect a big drop in urea prices because China is a major exporter of the product with significant underused production capacity.
A weaker yuan would allow it to undercut other suppliers.
Isaacson expects global urea prices would fall to US$259 per short ton from $283 under a 10 percent devaluation scenario. The price would plummet to $230 under a 25 percent devaluation scenario.
There would be a similar decline in UAN prices because North American farmers are “generally indifferent” between UAN and urea. UAN prices would fall to $196 per short ton from $213 under the 10 percent scenario and to $176 under the 25 percent scenario.
Ammonia is more independent than UAN and would not decline as much. The phosphate market would be spared because of stiff competition from India. The decline in potash demand would be swift.
Jean-Phillippe Gervais, chief agricultural economist with Farm Credit Canada, agreed there is a real threat China will devalue its currency.
The government is looking for ways to reignite China’s slumping economy, and lower inflation rates tend to lead to declining interest rates and a weakened currency.
If that occurs it could reduce demand in a top market for Canadian agricultural commodities such as canola, flax, peas and pork. China is Canada’s second most valuable agricultural market behind the United States.
Fortunately, Canada opened a currency hub for China’s yuan last month, which means traders can avoid the substantial transaction costs associated with converting everything to the U.S. dollar.
It could amount to a three to four percent savings on a typical transaction.
“The U.S. has more to lose with a lower Chinese currency than what we have,” said Gervais.
