Fertilizer supply and demand: A global market

This volatility, which can be explained by a combination of structural and conjunctional factors, has led farmers to raise some questions: Who are the players in this so-called worldwide market? How to explain the fluctuating prices? Can they be anticipated?

A delicate balance

In the main, fertilizer prices and foodstuffs result of the balance between supply & demand in a now global market place. This balance is currently at its most fragile. The increased volatility in prices of agricultural produces and raw materials, such as fertilizer (see figure below), reflects the tensions in foodstuff production across the world. In addition, the evolution of fertilizer and foodstuff prices has become increasingly correlated to the world’s economy. Farmers are seriously exposed to this new economic factor.

Fertilizer demand

Emerging countries such as China, India and Brazil have ever increasing demands for foodstuffs and energy. This trend is further accentuated by an increased demand for high-protein foods. The resulting increase in meat & dairy products leads inexorably to a higher demand for cereals. This general trend is further exacerbated by numerous governments across the industrialized nations encouraging the production of bio-fuels.

Over the last 10 years, the global demand for foodstuffs (consumption) has increased faster than supply (production). Over the same period, global stocks have been reduced by, on average, half. The demand for fertilizers, led by agricultural production, has followed the same trend.

Fertilizer supply

Over the last thirty years, global fertilizer industry has been shaped by an excess supply. Faced with an increasing demand, a lack of investment and a globalization of markets supply today is barely keeping up with demand. The market for nitrogen-based fertilizers is determined by the price for ammonia (NH3) an intermediate for fertilizer production.

Ammonia production requires high amount of natural gas. In the end natural gas represents more than 50% of the cost prices of nitrogen fertilizer’s production. As gas price increases, some production plants are shut down. Over the longer term, it reduces the profitability of production plants and leads to a decrease in investment in new production capacity. Low gas prices are a factor of competitiveness in the fertilizer industry. This is why, over the past few years, mineral fertilizer production plants have been relocated in resource-rich countries (Russia, Iran, Qatar, North Africa). Remoteness of production sites, along with geo-political instability has increased uncertainty in terms of both production and procurement, stimulating volatility.

Is there enough competition?

The nitrogen fertilizer market is shared by a great number of suppliers from all over the world. Yara represents only 6% of the world-wide nitrogen supplies. The fragmentation of the nitrogen fertilizer marker with its many supplies ensures that process are adjusted as a balance of demand and supply. The observed market volatility shows that prices cannot be controlled but are fixed by market dynamics.

And what about speculation?

With the structural and conjunctional tensions in mind, the role of speculation arises. Market values are no longer based solely on the difference between supply & demand, but are evolving exponentially. For example: if less than 10% of world production is traded on the global commodity markets, a 2% decrease in production will be primarily deducted on exportations, creating a 20% shortage of globally traded volumes.

Initially the financial instruments are created to cover a genuine risk inherent in agriculture (low yield harvest, drops in price), designed to stabilize prices. However, they are mostly disconnected from actual production. In summary, volatility is caused by tight market situation which in turn encourages speculative actions.