The year ahead: resilient but not immune

2021 MARKET OUTLOOK

The year ahead: resilient but not immune

As the Covid-19 pandemic continues, we look ahead at fertilizer industry prospects for the next 12 months, including the key economic and agricultural drivers likely to shape the market during 2021.

Economic backdrop

The exceptional contraction in economic activity triggered by the Covid19 pandemic in 2020 looks like being far worse than the Great Recession of 2009. The world economy is currently projected to shrink by 4.4 percent in 2020, according to the latest International Monetary Fund (IMF) forecast. Although worldwide growth is expected to rebound sharply this year, rising by 5.2 percent overall in 2021, the extent and speed of this recovery, for individual countries and from region-to-region, remains unpredictable.

Alongside the headline economic impacts, the pandemic’s signature features – widespread and intermittent national lockdowns, disruptions to international trade and travel bans – have created paralysing business uncertainty. These disruptions have also been accompanied by alarming levels of foreign exchange rate and commodity price volatility.

Oil prices, for example, collapsed by two-third during the first-half of 2020 before rallying in the year’s second-half. Brent crude, which dropped from $68 to $23 between January and May, ended 2020 at $50 a barrel – a remarkable rally that few predicted would happen so soon. Food commodity prices have been on a similar rollercoaster ride, having fallen to threeyear lows in May 2020 before rallying to six-year highs by the year’s end.

The fertilizer market, while not immune from the pandemic and its consequences, has proved to be remarkably resilient during 2020 – faring much better than originally expected. This reflects the better-than-average performance of the wider agricultural sector, as the International Fertilizer Association (IFA) recently reported1 :

“Food and agriculture are essential sectors, in which production and transportation continued during lockdowns. Moreover, bulk shipping, the main transport mode for agricultural goods, has been far less affected by restrictions than other forms of transport.

“In addition to categorising agriculture and fertilizers as essential, major jurisdictions have moved swiftly to support their agriculture and fertilizer sectors.”

As the time of writing, business and financial markets are operating under the assumption that the pandemic will be brought under control by the end of 2021, although uncertainty remains about the speed of both vaccine development and immunisation (see main photo).

While the lingering effects of Covid-19 are not expected to cause major disruption to fertilizer supply and distribution during 2021, there are concerns that advanced purchases made by farmers at the height of the pandemic could lessen fertilizer sales this year and into next1 .

Global growth – calamity, not catastrophe

Despite a recent upgrade to its growth forecast, the International Monetary Fund (IMF) is sticking by its forecast of a deep global recession, and currently expects the world economy to shrink by 4.4 percent in 2020.

This latest forecast bleakly illustrates the complete reversal of fortune that Covid19 has inflicted on the world economy, given that the IMF was forecasting a global economic expansion of three percent for 2020 just 12 months ago (Fertilizer International 494, p22).

Gita Gopinath the IMF’s chief economist, did not pull her punches – calling last year’s economic collapse a calamity:

“This is the worst crisis since the Great Depression, and it will take significant innovation on the policy front, at both the national and international levels to recover from this calamity. The challenges are daunting. But there are reasons to be hopeful.”

She added: “The ascent out of this calamity is likely to be long, uneven, and highly uncertain. It is essential that fiscal and monetary policy support are not prematurely withdrawn.”

Nevertheless, Ms Gopinath singled out for praise “the exceptional policy response” of governments during the Covid-19 pandemic, saying this was “a powerful reminder that well-designed policies protect people and collective economic wellbeing”.

Timely government intervention during 2020 had “saved lives and livelihoods and prevented a financial catastrophe” in her view. Global fiscal support of nearly $12 trillion, extensive interest rate cuts, injections of liquidity, and asset purchases by central banks have all helped to lessen effects of the Covid-19 pandemic.

The IMF is currently forecasting a strong rebound in global growth of 5.2 percent in 2021. Following a healthy recovery this year, the IMF expects annual global growth to then slow to around 3.5 percent over the medium term. The economic prospects of the advanced economies also look set to diverge from those of emerging and developing nations.

Advanced economies, which are projected to contract by 5.8 percent in 2020, look set to rebound with 3.9 percent growth in 2021. Emerging market and developing countries, meanwhile, which are projected to contract by 5.7 percent in 2020, are forecast to recover faster with five percent growth this year.

The pandemic will result in a cumulative loss in global output costing 11 trillion dollars over the short-term (2020-2021), according to the IMF, rising to 28 trillion over the medium-term (2020-2025).

“This represents a severe setback to the improvement in average living standards across all country groups,” it comments.

The IMF warns of the “tremendous uncertainty” surrounding the world economic outlook due to both downside and upside risks.

A resurgence of the virus, further lockdowns, and a deterioration in the prospects for treatments and vaccines all carry downside risks, in the IMF’s view: “The toll on economic activity would be severe, and likely amplified by severe financial market turmoil. Growing restrictions on trade and investment and rising geopolitical uncertainty could harm the recovery.”

While on the upside, faster and more widespread Covid-19 testing, when combined with effective treatments and vaccines, could significantly improve economic outcomes this year, concludes the IMF, especially when coupled to extra policy stimulus.

Food prices reach six-year high

As 2020 drew to a close, the FAO’s Food Price Index (FPI) reached its highest level since the end of 2014, averaging 105.0 points in November, nearly seven percent (6.4 points) higher than a year ago. November’s gains were driven by acrossthe-board price rises, led by vegetable oils followed by sugar, cereals, dairy and meat.

The November 2020 vegetable oil price index (121.9 points) reached its highest level since March 2014, after a stunning month-on-month gain of nearly 15 percent (15.4 points). The rally was driven by the combination of a spike in palm oil prices and rises in soy, rapeseed and sunflower seed oil values. International palm oil price quotations rose for a sixth consecutive month in November, linked to falling world inventory levels and firm global import demand.

The cereal price index (114.4 points) has risen by 20 percent (19.0 points) since November 2019, having increased for five consecutive months in a row. Wheat export prices have edged upwards on the prospects of tighter export supplies and a reduced Argentinian harvest. Maize prices have been supported by large Chinese purchases and cuts to US and Ukraine production estimates. Firm demand has continued to push up barley and sorghum prices, while international rice prices have held steady.

The sugar price index rose by three percent (2.8 points) in November to reach 87.5 points, its second consecutive monthly increase. A forecast fall in 2020/21 global production, due to weaker crop yields in the EU, Thailand and Russia, have driven up international sugar quotations. Sugar prices have also been supported by hurricane damage to sugarcane crops in Nicaragua, Honduras and Guatemala.

Agricultural commodities: bull run defies expectations

The rally in agricultural commodity prices in 2020 has confounded expectations, according to Rabobank’s latest annual outlook.

“The 2020 bull run in agri commodities defied all expectations and proved immune to Covid-19’s economic and social consequences,” says Rabobank: “While coffee and cocoa suffered, grains & oilseeds reached multi-year highs. Even palm oil and sugar – commodities closely associated with the energy market and therefore GDP growth – performed remarkably well.”

The bank identified a number of factors behind the price rally of the last 12 months, including:

• Speculators buying record amounts of agricultural commodity futures in 2020 as investment assets, amplifying the price upside
• Very resilient demand – particularly from China – resulting in only a small global wheat surplus and dwindling stocks of corn and soybeans
• Many countries seeking to guarantee their domestic supplies of agricultural commodities – particularly for wheat – leading to a scramble for available stocks.
• La Niña affecting farmers across the globe, worsening the availability of a range of agricultural commodities.

The “very visible” consequences of La Niña will continue to drive up prices in 2021, according to Rabobank. Risks are elevated in South America due to the start of key crop periods there. Dryness in the south of Brazil and parts of Argentina, for example, has already affected sugarcane and wheat harvests and soybean planting. A lack of snow cover this winter, again linked to La Niña, could negatively affect the wheat crop in both the US Midwest and Russia, potentially leading to much lower exportable availability.

Rising food prices have been at the top of the list of concerns for many governments, according to Rabobank: “Dry weather events and speculations have been driving prices higher over 2020, with the Bloomberg Agriculture Spot Index, based on nine crop prices, rising 28 percent since late April, to its highest level in more than four years, led by increases in wheat, corn, soybeans, and sugar.”

As a consequence, Rabobank expects to see greater stock piling of agricultural commodities by importing countries accompanied by diminishing stock levels in the countries of origin.

Resilience has been global agriculture’s defining characteristic during 2020, reports Rabobank: “Agricultural supply chains have shown incredible resilience in 2020, with only minor delays at certain ports and very few localized issues. Agriculture was mostly spared from the global slump in international trade.”

Despite bucking the general trend last year, agriculture faces an uncertain outlook in 2021, with US-China relations, in particular, likely to remain tense. While Rabobank expects a strengthening US dollar to result in weaker prices for US agricultural commodities in 2021, it does not expect Brazil’s currency to return to the weaker levels seen last year.

Fertilizer demand

Disruption – initially by extreme weather and then by the Covid-19 pandemic – has undoubtedly been the key watchword governing the fertilizer market over the last two years. This could well continue too, given the likely prospect of La Niña effects next year.

Fertilizer demand has yo-yoed in recent years. Going back to 2019, Nutrien infamously described the spring that year as “the worst US planting season in history” after record rainfall prevented crop planting across 10 million acres – a new US record. This followed and compounded a poor US fall application season for fertilizers in 2018.

These unfavourable North American market conditions actually tipped world fertilizer demand into reverse in 2018/19. Global fertilizer consumption did, however, subsequently recover by 1.6 percent in 2019/20 to reach 189.8 million nutrient tonnes, according to the International Fertilizer Association (IFA), almost reversing the contraction of the previous year (Table 1, Figure 1).

The global recovery in fertilizer use seen in 2019/20 was led by India, which enjoyed abundant monsoon rains, and the US, which, at long last, benefitted from favourable weather conditions. As a consequence, South Asian and North American fertilizer use both increased by almost six percent in 2019/20, each region adding 2.0 million tonnes and 1.4 million tonnes to nutrient demand, respectively1 .

Then Covid-19 happened. With the pandemic’s arrival in March 2020 further large-scale disruption to the fertilizer market looked almost inevitable, given the unprecedented damage inflicted on other parts of the world economy. As late as May 2020, IFA was forecasting a three percent year-on-year decline in global fertilizer demand in 2020. This would have been the largest contraction in the fertilizer market since the eight percent drop that occurred during the global financial crisis more than a decade ago.

When the Covid-19 crisis began last spring, potash and phosphate consumption were thought to be particularly vulnerable to supply disruption and falling demand. This reflected the reliance on imports in key consuming countries, as well as the expected negative impact of the pandemic on potash- and phosphate-hungry crops such as fruit and vegetables, sugar and palm oil. Nitrogen consumption, in contrast, was expected to be more robust and inelastic. Nitrogen demand was known to have held up well during past economic downturns, due to its association with broad acre agriculture and the production of food staples.

Contrary to initial forebodings, the fertilizer market proved to be remarkably resilient as 2020 progressed, bucking the general economic trend and confounding the original downbeat expectations. The fertilizer sector instead overcame the widespread economic paralysis from Covid19 lockdowns to rebound strongly during 2020. Indeed, IFA currently expects world fertilizer demand to grow by two percent in 2020/21 to reach 193.5 million nutrient tonnes1 , boosted by a particularly healthy year-on-year rise in phosphate consumption (Table 1).

A number of factors have sustained fertilizer demand during the pandemic (see box). In particular, national governments moved quickly to prioritise food supplies – introducing mitigation measures that supported and protected the fertilizer industry and the wider agricultural sector. Demand has also been bolstered by attractive fertilizer-to-crop price ratios in 2020 and favourable weather conditions in key end-markets. Weakening of domestic currencies, versus the US dollar, has also boosted profits in key agricultural-exporting countries1 .

Indian agriculture again enjoyed a good monsoon in 2020. As a consequence, Kharif season sowings have increased, with prospects for the Rabi season looking similarly good. The subcontinent has emerged as the single biggest contributor to global growth in fertilizer demand last year, according to IFA, with India alone expected to account for over half the world’s total extra consumption during 2020/21. Higher consumption in the Americas (Brazil, United States, Argentina, Mexico, Canada), Asia-Pacific (Pakistan, Bangladesh, Australia, Philippines) and Russia also look set to contribute to rising global demand over this period to slow this year and into next. The association is currently forecasting an increase of one percent in global fertilizer demand in 2021/22 – equivalent to a 2.1 million tonnage rise to 195.6 million nutrient tonnes (Table 1). Regionally, sizable increases in fertilizer consumption are still expected in South Asia, Eastern Europe, Central Asia, Latin America and Africa. Such gains could be partly countered by a range of negative factors, suggests IFA, including1 :

• The likelihood of La Niña weather events
• Lower demand due to advance fertilizer purchases in 2020
• The effects of a patchy and uneven global economic recovery in 2021 on fertilizer purchasing behaviour and financing, as well as overall consumer food demand
• Introduction of new regulations that limit fertilizer use in China, Europe and New Zealand.

More positively, IFA notes that fertilizer usage is being underpinned by last year’s strong recovery in crop prices, and supported by the rebuilding of the Chinese swine herd, which should improve feed demand1 .

Fertilizer production and trade

Urea: Preliminary estimates suggest world urea production was particularly resilient in 2020, increasing by almost three percent to 182 million tonnes (+ 5 million tonnes). Similarly, global urea exports – equivalent to almost 30 percent of world production – also increased vigorously last year (+3.4% to 52 million tonnes).

Three countries combined – India, Brazil and the US – accounted for more than forty percent of global urea imports during the year. Thailand, Australia and Vietnam were the other major import destinations. Ukraine’s return as a major exporter, after four preceding years of decline, was a notable feature of last year’s urea market feature. Urea exports to Indonesia also increased significantly in 20201 .

World urea capacity is projected to grow by three percent in 2020 and 2021 to reach 223 million tonnes (+14 million tonnes). New urea capacity is expected in India (+5.0 million tonnes), Nigeria (+2.6 million tonnes) and Iran (+1.1 million tonnes), as well as Azerbaijan, Uzbekistan and Russia (+2.5 million tonnes) in 2020 and 20211 .

Phosphates: Global production of finished phosphates in 2020 is expected to remain flat at 69 million tonnes, according to preliminary IFA estimates. Monoammo-nium phosphate (MAP) output grew strongly (+4% year-on-year), while diammonium phosphate (DAP) production fell (-3%).

DAP exports last year expanded by almost two percent year-on-year to reach 18 million tonnes. More than half of DAP production in 2020 (34 million tonnes) was traded internationally. Five destination countries (India, Pakistan, the US, Bangladesh and Turkey) accounted for more than fifty percent of global DAP exports. While DAP imports to Pakistan and Bangladesh increased in 2020, lower US, Indian and Turkish imports are anticipated.

Globally, finished phosphates capacity is forecast to increase by 2.4 million product tonnes in 2021 (+2.5% to 47.3 million tonnes P2 O5 ), driven upwards by new projects in Brazil (Serra do Salitre), India (Tuiticorin), Kazakhstan (Taraz) and Tunisia (M’dhilla), alongside an expansion in existing Russian capacity (Volkhov).

Potash: Following a fall in output in 2019 (-3.3%), world muriate of potash (MOP) production is expected to increase by just under one percent year-on-year in 2020 (+600,000 tonnes) to 67 million tonnes, with rising output in the Americas offsetting decreases elsewhere.

Preliminary estimates suggest worldwide MOP trade grew rapidly last year (+5.8% to 51.4 million tonnes). Higher imports to the US, Brazil and India more than offset slight import decreases into China, Indonesia and Malaysia1 .

World potash capacity is forecast to rise by just over six percent (+3.7 million tonnes K2 O) during 2020 and 2021 to reach 63.6 million tonnes K2 O. This will be driven mainly by the entrance of new MOP projects in Russia and Belarus. These are expected to add around 2.4 million tonnes of extra MOP product capacity in 2020 alone. In a landmark development, the commissioning of two projects in Australia is also expected to bring extra primary sulphate of potash (SOP) capacity (+0.3 million tonnes) on-stream this year1 .

Price outlook

Urea: Prices varied between $260-280/ tonne in major end-markets during the second half of 2020, supported by record demand in India and Brazil. Looking ahead, Rabobank expects new production capacity to weigh on the market in 2021. Prices could come under pressure in the second-quarter, as soon as US and European demand wanes, potentially settling slightly below $200/t2 .

Phosphates: Falling demand in South America at the end of 2020 is likely to pressure prices in the short-term. Phosphate prices should, however, find support due to better farm economics – the result of higher international wheat, soybean, corn and cotton prices. The prospect of new import tariffs on Russian and Moroccan phosphate imports is also likely to create a premium on cfr prices in the US, and on f.o.b. prices in selected exporting countries such as Mexico, Australia and Saudi Arabia2 .

Potash: Weak trading conditions in the first-half of 2020 saw prices reach their lowest levels in a decade. These subsequently recovered in the year’s second-half on the back of resurgent demand. Prices are likely to continue to increase at a slow but constant pace in the next six months, predicts Rabobank, as the market tightens. Factors such as improving US farm demand and higher import demand from Brazil should act to support prices in the first-half of 2021. On the supply side, the potential for disruption from the political crisis in Belarus, the world’s second largest potash exporter, remains a wildcard factor2 .

Author’s note

Please note that the FAO’s Food Price Index (FFPI) was expanded in July 2020 and its base period revised to 2014-2016. Values are therefore not directly comparable with those quoted in last year’s market outlook (Fertilizer International 494, p22).

References

1. IFA, 2020. Short-Term Fertilizer Outlook 2020-2021. Public Summary. IFA Virtual Strategic Forum, 17-19 November 2020. International Fertilizer Association (IFA).

2. Almeida, M., 2020. Semi-Annual Global Fertilizer Outlook. Rabobank. December 2020.