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Globally, fertilizer prices are witnessing significant spike, thanks to the rising food demand and supply constraints further compounded by rising input costs. Global food demand has been increasing since last few years driven by driven rising population, rising standard of living in developing nations, and increasing use of food grains such as corn, maize, soybean in production of bio fuels. Rising food demand coupled with supply constraints due to limited availability of arable land, climatic changes, export restrictions by various governments have necessitated increase in agricultural productivity boosting demand for agricultural inputs such high yielding seeds, pesticides and fertilizers
Though high yielding genetically modified (GM) seeds, resistant to climatic changes and pests can be used to increase productivity but their utilization is limited due to government restrictions and severe opposition from environmentalists. The use of pesticides and insecticides is also of limited use as excessive application can render crop unfit for human consumption. Hence the onus of increasing agricultural productivity largely falls on fertilizers. Thus, going forward fertilizer usage is expected to increase significantly sustaining higher fertilizer prices. Furthermore, rising input costs of key raw materials such as natural gas and sulphur coupled with rising transportation costs, due to higher crude oil prices, will result in higher fertilizer prices. Prices of natural gas and sulphur used in production of nitrogen and sulphur fertilizers have increased 62% and 350% y-o-y in June 2008, respectively. (Source: Bloomberg and Tempa Sulphur)
Of the three main fertilizer groups’ nitrogen, potash and phosphate, potash prices have witnessed maximum surge as the supply is concentrated in Canada, Russia and Belarus whereas nitrogen and phosphate supply is more diversified and spread over across the globe. Fertilizer prices have increased more than twofold in FY 2008, compared to FY 2007, (Source: Based on average realized price of leading fertilizer companies such as Mocaic, Potash Corporation and Agrium) driven by rising demand and restricted supply. Bill Joyce, CEO of Potash Corporation, expects fertilizer prices to increase further over next 5 years as no new significant supply is expected to come before 2012. Dwindling global stock to use ratio, which has declined from 23.0% in 2004 to 18.8% in 2007(Source: Food and Agriculture Organization) , has intensified global food crisis further boosting demand for fertilizer.
While demand is rising governments are discouraging exports of fertilizer through bans and higher duties to meet their domestic demand. This has further tightened the demand-supply scenario. On 20 April 2008, China levied custom duty of 135% on export of Urea, which resulted in US$200 per ton increase in Urea prices to US$700 per ton.
The significant increase in fertilizer prices is to some extent driven by cartelization of the industry due to lenient laws in US and Canada. All three major potash companies in Canada jointly market their products through Cantopex which grants them undue advantage while negotiating prices with customers. Cantopex in collaboration with other major potash producers based in Russia and Belarus has been able to negotiate approximately 230% increase in contract prices with Indian and Chinese fertilizer procuring agencies for potash delivery in FY 2008. The increase in fertilizer prices has been criticized by representatives of fertilizer consuming economies as unfair and unjustifiable as demand for fertilizer has increased only moderately as compared to huge increase in prices. (Dr.U.S. Awasthi, MD, Indian Farmers Fertilizer Co-operative Limited & J.S Sharma, Secretary, Fertilizer, Department of Fertilizer (India)).
Fertilizer companies are reaping high benefits from rising prices. EPS of leading fertilizer companies such as Uralkali OAO (Russia), Israel Chemicals Limited, PotashCorp, Agrium and Monsanto is expected to increase by 435%, 289%, 241%, 154% and 94% respectively in FY 2008. (Source: Company Data and Guidance, Bloomberg Consensus estimate) Markets have reacted enthusiastically to the rising prices resulting in manifold increase in share prices of fertilizer companies. Intrepid Potash Inc, US’s largest potash producer, listed at a premium of 58% from the issue price making it one of best performing stock among newly issues shares. PotashCorp’s common stock has increased more than 160% in the last one year making it largest Canadian company in market capitalization terms. Fertilizer companies has been one of the best performing group in stock market in last one year while most other sectors have been reeling under pressure from credit crisis and rising raw material prices.
Nevertheless, besides criticism for undue profiteering by cartelization fertilizer prices is largely driven rising food demand on back of:
1. Rising world population, which is expected to increase 1.14% annually to 8.0 bn by 2025 (Source: UN)
2. Better standard of living in emerging economies. E.g. as Chinese become more prosperous they are consuming more meat, 20 kg per capita per year in 1980 to 50 kg per capita per year in 2007, which will result in increased food demand as 6 kg of food grain is required to produce 1 kg of meat. (Source: FAO & Paul Collier, Professor of Economics, Oxford University)
3. Use of food grains for alternative applications such as bio fuel production is expected to increase 388% to 21 mn ton in 2017, compared to 4 mn ton in 2007. (Source: FAO & OECD)
Thus, over medium term fertilizer prices will be able to sustain high levels on back of prevalent cartelization among suppliers, increasing food demand and supply constraints. However, new production plants and efficient utilization of fertilizer will turn the tables and normalize prices by 2011-2012. (Source: FAO)