Competition and Prices
AIC Position Statement and Q & A on Fertiliser Prices
A wide range of global factors affect the price of fertiliser, most relate to supply and demand. Supply can be affected by production capacity (these are very complex chemical factories ) and availability of energy for production. Demand is strongly influenced by produce prices which causes planted areas and application rates to increase or decrease. Demand for food production continues to grow on the back of global population growth and changes in diet. Growth in Biofuel markets will also support demand.
Why does the fertiliser price rise in response to increases in the wheat price- is this just profiteering?
- Fertiliser production is limited in terms of flexibility; production plants are expensive to build and run and so are run at capacity 24/7 all year round with little opportunity to suddenly increase production. Increasing output prices, predominantly cereals, will encourage farmers wherever they might be, to increase planted area and apply more fertiliser. The increase in demand and no further capacity results in price increases in the market for fertiliser as a whole. When wheat planting is reduced as a result of a lowering of the wheat price, in the absence of any other market forces, excess capacity in the market for fertiliser means the price drops correspondingly.
What else affects the Fertiliser price?
In the UK market, the majority of Nitrogen has to be imported as does most of the Sulphur. All Phosphate requirements have to be imported. We have domestic reserves of Potash that supplies the majority of requirements. The result of this is that UK prices are not driven by UK producers but by global markets and the cost of alternative products available on a ship.
Demands for crop growth and production capacity to supply this has been mentioned, but the picture is complicated by a number of other factors.
The cost of energy is approximately 70% of production costs and a significant input. Depending on selling price relative to energy a floor price will arise below which some producers (non UK) decide to curtail production.
Fertiliser production plants operate all year, but the majority of field applications will occur in 4 months, so to get all product made and delivered to farm for use in spring requires movement all year. If the buyer does not feel it will pay to buy early and store fertiliser until needed, he may delay purchase. Manufacturers, wherever they may be, do not have resources to keep producing and pay for storage over extended periods, so may have to reduce production. When application time gets nearer and a lot of product is required in a short space of time this will cause the price to rise – supply and demand again.
Many key exporting countries are affected by political stability, Ukraine, Egypt, North Africa, Middle East – this also has a bearing on supply and further investments.
- Even something as simple as extended bad weather can affect prices, as farmers delay ordering until the last minute and then find that available stocks are limited when everyone tries to order at the same time. Ordering in extra supplies from abroad requires finding a supplier with surplus capacity and chartering cargo vessels and scheduling port time and transport, this all takes time.
Over recent years, global demand for fertilisers has been growing faster than supply in new production. The commodity price spikes of 2009 encouraged more investment in fertilisers and that extra capacity is now coming to market which is helping supply, but also the older more polluting production, particularly in China, is being taken out of production.
- Many countries around the globe, particularly in Asia where there is high population growth but low productivity, subsidise fertilisers to their farmers or impose swingeing export tariffs to ensure food security, this can have a dual affect by either stimulating fertiliser demand, or limiting fertiliser for export from those countries.
How does European fertiliser industry competition work?
- Restructuring of the fertiliser manufacturing industry was necessary to secure a sustainable, long-term base for manufacturing fertilisers and process chemicals in the EU. Industry has to be able to use economies of scale to be able to compete with other countries with access to cheap sources of energy. That has meant rationalisation of businesses to create larger ones that can compete in terms of scale and buying power, and which are capable of providing economic security of supply at a time of concern over political insecurity in the east especially in former Soviet Union countries. Food security is a high profile political issue currently, and UK fertiliser security and the importance of keeping UK production capacity is integral to the food security issue.
What is planned in terms of new capacity?
- New capacity is largely determined by availability and price of energy resources. These are predominantly outside Europe, the US and its shale gas access has encouraged new production, as has N Africa, Middle East, some regions of Asia. UK production continues to be upgraded for capacity and efficiency rather than ‘new’ plants.
How transparent is the industry?
- The fertiliser sector is one of the most transparent of any market. There is an abundance of national and international publications – print and online – delivering a wealth of commercial and marketing information on a weekly and daily basis.
Should farmers attempt to reduce costs by applying less fertiliser?
- Fertilisers are the most cost effective input a farmer will use on his crops. While response clearly varies, for most growers in the global market it will double the yield of crops and give returns from 5 to 10 times the cost of the fertiliser applied. A lot of research goes into the efficiency of fertiliser use and reducing the cost per tonne produced, but for most growers this does not mean reducing fertiliser rate.
Is there any advice on buying strategy?
- As has been discussed, fertiliser markets are complicated and becoming increasingly volatile. As UK farmers usually sell their output eg Wheat over a period of time to manage the risk of volatile grain markets, the same approach to fertiliser is becoming increasingly popular. Where storage is available, buying 1/3 at the start of the season in June, 1/3 post harvest in Sept/Oct and the remainder early spring will average the seasons pricing.
AIC September 2018