Fertilizer International 506 Jan-Feb 2022
31 January 2022
The year ahead: affordability and availability concerns
2022 MARKET OUTLOOK
The year ahead: affordability and availability concerns
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 2022.
What drives fertilizer demand?
Fertilizer demand is influenced by the complex interplay of many factors – some of which are harder to predict than others. In the short-term, the main drivers of demand include:
- Farm economics and the macroeconomic outlook
- Crop prices and fertilizer-to-crop price ratios
- Crop mix, growing areas and crop yields
- Soil nutrient levels and nutrient replenishment
- Policy, regulation and fertilizer subsidies
- Sustainability, nutrient management and recycling
The importance of these factors varies from country-to-country and region-to-region. Adding to the complexity, these primary drivers are in turn influenced by a host of secondary considerations.
Macroeconomic conditions, by triggering slowdowns or expansions in global, regional and national growth, control overall economic demand and affect the health of agricultural markets. Farm economics and attendant issues such as credit availability and barter ratios have a more direct impact on the ability of farmers to purchase fertilizers.
Crop prices and fertilizer-to-crop price ratios act as key controls on crop nutrient demand as they play a critical role in determining farm buying power and fertilizer affordability. Crop prices in turn are driven by the harvest size annually, stock levels and demand for agricultural commodities. Fertilizer industry analysts pay particularly close attention to the prices of cereals, oilseeds, cotton, sugar and palm oil, the main fertilizer-consuming crop types globally.
The biofuels market is also an important driver of fertilizer demand due to large-scale cultivation of maize and sugarcane for ethanol and oilseed rape (canola) for biodiesel (Fertilizer International 474, p22). Crop failures due to extreme weather events such as the El Niño (Fertilizer International 475, p38) and La Niña can also affect fertilizer demand in the short-term.
Economic backdrop
The world is continuing to recover from the exceptional contraction in economic activity triggered by the onset of the Covid-19 pandemic in 2020 (Fertilizer International 500, p13)
Global growth is currently projected to increase by 5.9 percent in 2021, according to the latest International Monetary Fund (IMF) forecast. Growth is expected to continue to rebound strongly this year, rising by 4.9 percent overall in 2022. Yet the extent and speed of this recovery, for individual countries and from region-to-region, remains unpredictable.
Strong fundamentals and policy measures in advanced economies such as the US and the European Union are expected to support solid economic growth this year. In emerging markets, while some commodity-exporting countries (e.g., Russia, Brazil and Mexico) are recovering swiftly, recovery elsewhere will be strongly linked to vaccine access. China’s resilient powerhouse economy is expected to show robust growth during 2022, despite concerns over the stability of its property and financial sectors1 .
Natural gas prices have surged in recent months – driven upwards by a combination of resurgent demand and stagnant supply – with European and Asian spot prices reaching record highs. In Europe, the resulting energy crunch has triggered a chaotic collapse in ammonia production (Fertilizer International 505, p8).
Disruptions to shipping and global supply chains inflicted by the Covid-19 pandemic are continuing – leading to longer transit times and higher international freight costs. As a consequence, commodity markets are expected to be affected by elevated shipping costs into 20221 .
Some major fertilizer-producing countries have reacted to supply chain disruptions and inflationary pressures by restricting exports in 2021’s last quarter (Fertilizer International 505, p4). Most notably:
- China acted to freeze fertilizer exports in October
- Turkey set export restrictions on diammonium phosphate (DAP) and NPK fertilizers, while Vietnam placed a six percent import duty on DAP
- In November 2021, Russia introduced a six-month export quota on nitrogen and phosphate fertilizers
- Similarly, Egypt halted any nitrogen exports not specifically cleared by the country’s ministry of agriculture.
Waxing and waning global demand
Fertilizer demand has been on a rollercoaster ride in recent years, with periods of both contraction and expansion. Going back to 2019, Canadian fertilizer giant 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 (Fertilizer International 500, p13).
These unfavourable North American market conditions tipped world fertilizer demand into reverse in 2018/19. Global fertilizer consumption did, however, subsequently recover by 1.9 percent in 2019/20 to reach 189.8 million nutrient tonnes, according to the International Fertilizer Association (IFA), 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 (Fertilizer International 500, p13).
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 (Fertilizer International 500, p13).
However, 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 Covid-19 lockdowns to rebound strongly during 2020. Indeed, IFA currently expects world fertilizer demand to grow by more than six percent in 2020/21 to reach 203.8 million nutrient tonnes (Table 1). This 12 million tonne increase is the largest annual expansion in fertilizer use since 2009/101 .
A number of factors sustained fertilizer demand during the pandemic. 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 was also 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, also boosted profits in key agricultural-exporting countries (Fertilizer International 500, p13).
In combination, these government measures are having negative impacts on fertilizer availability and trade flows globally1 .
Food prices reach 10-year high
The FAO Food Price Index (FFPI) reached its highest level in a decade as 2021 ended, averaging 133.7 points in December, some 23 percent higher than a year ago. In real terms, this has boosted food prices to levels last seen in the mid-1970s.
The FFPI averaged 125.7 points for 2021 as whole, almost one-third higher (28 percent) than the previous year’s average, with prices of cereals, vegetable oils, and sugar all sharply up on 2020.
The cereal price index averaged 131.2 points in 2021, the highest annual average since 2012 and up by 27 percent on 2020. Maize and wheat prices rose on strong demand and tighter supplies. Rice, meanwhile, was the sole major cereal to register a price decline last year, reflecting ample export availability.
The vegetable oil price index rocketed to an all-time high in 2021, averaging 164.8 points, an increase of 66 percent on 2020. As the year closed, world soy and rapeseed oil prices maintained their strength, being underpinned by firm import demand (primarily from India) and protracted global supply tightness, respectively.
The 2021 sugar price index – averaging 109.3 points, up 38 percent on 2020 – reached its highest level since 2016. Price increases throughout the year were supported by concerns over falling Brazilian output at a time of stronger global demand.
Agricultural commodities: grim prospects after a stellar year
Demand for agricultural commodities has been stellar over the last 12 months, comments Rabobank in its latest annual outlook. Not always due to consumption either. The precautionary buying of ’just in case’ stocks, the bank suggests, is putting pressure on supply chains that are already stressed on a number of fronts.
Rabobank predicts that food prices are unlikely to return to five- or ten-year averages in 2022. This is due to a range of inflationary pressures, including high shipping costs (astronomical for containers), escalating energy and fertilizer prices, as well as labour shortages in many countries.
- Brazil, on top of an extended drought, experienced its worst frost in over two decades in July last year
- The major North American drought, that first started in the west of the country in late 2020, extended north in mid-2021, and is likely to expand into Kansas in the coming months
- Europe was affected by strong rainfall and flash floods last summer
- Europe and Canada also broke maximum temperature records in the summer of 2021
- Finally, current La Niña conditions are likely to persist into 2022’s second-quarter.
In summary, If 2021 was a stellar year for ag commodities, Rabobank’s outlook for 2022 is more grim – with warnings of potential social discontent due to food price inflation:
“Higher farm input costs, expensive shipping and good demand provide for a grim combination. We should see these inflationary pressures move upstream along the supply chain to reach consumers in 2022, with uncertain social consequences.”
“The proportional increase in prices on supermarket shelves will of course be much smaller, as commodity prices are usually only a relatively small proportion of the prices of final goods. But social discontent is already being felt in a few countries and more is likely to come in 2022.”
Fertilizer demand
Continuing the seesaw in consumption (see box), the International Fertilizer Association (IFA) expects fertilizer demand to have slipped into reverse last year – driven downwards by negative changes to affordability. The association is currently forecasting a contraction of three percent in global demand in 2021/22 – equivalent to a drop of 5.5 million tonnes to 198.2 million nutrient tonnes, with all three nutrients being negatively affected (Table 1, Figure 1).
The international prices of the main commodity fertilizers all rose sharply over the course of 2021 to outpace crop prices. In particular, the affordability of urea and diammonium phosphate (DAP) declined relative to grains, while that of muriate of potash (MOP) fell relative to soybeans. The continued growth in palm oil prices did, however, maintain the affordability of MOP in this market.
Looking ahead, the demand outlook for this year is clouded and uncertain – due to emerging availability as well as affordability concerns – with IFA commenting1 :
“Most correspondents highlighted the difficulty in forecasting 2022/23 fertilizer demand given the current uncertainty regarding crop prices, fertilizer affordability and fertilizer availability. Fears of nitrogen shortages in the second half of 2021 were driven by production cuts at some plants, related to soaring gas prices, and other factors disrupting fertilizer supply.”
Nevertheless, demand fundamentals are expected to improve this year and into next, with IFA forecasting a three percent recovery in global fertilizer demand in 2022/23, rebounding from the three percent fall seen in 2021/221 .
Fertilizer production and trade
World production and trade in urea and finished phosphates are estimated to have fallen last year – the victim of the supply disruptions that have emerged across the major fertilizer markets. As a result, fertilizer availability, not just affordability, has become a source of growing concern, with multiplying disruptions prompting a rapid increase in fertilizer prices over the course of 2021 and into this year.
- Physical disruptions to US nitrogen and phosphates production due to weather-related events
- Economic disruptions to European nitrogen production due to the tight energy market and soaring gas prices
- Looming geopolitical disruption due to incoming sanctions affecting potash exports from Belarus, and three major producing countries (China, Russia and Turkey) limiting their exports to protect domestic fertilizer supply.
Urea: Nitrogen availability in 2021 was hampered by both high energy prices and export restrictions. Consequently, supply disruptions are now expected to result in year-on-year (y-o-y) decreases in world ammonia and urea production in 2021, pushing these to below 2019 levels in both cases. Urea production last year is thought to have contracted to 176.8 million tonnes.
Similarly, global urea trade is estimated to have fallen by almost 1.5 million tonnes y-o-y in 2021. Lower urea imports into India, Mexico and Turkey reflected lower export levels from Ukraine, West Asia, Algeria and China.
World urea capacity is projected to increase by 14.3 million tonnes in 2021 and 2022. IFA is forecasting the commissioning of 18 nitrogen projects over this two-year period – a highly significant volume of new capacity following a quiet year for plant start-ups in 20201 .
Phosphates: Global production of finished phosphates in 2021 is thought to have remained flat, the IFA suggests. Nevertheless, an increase in monoammonium phosphate (MAP) trade for the year is predicted. Rising Brazilian import demand during 2021 was satisfied by higher MAP exports from China and Russia, more than offsetting the decline in US exports to the country.
Global diammonium phosphate (DAP) trade, meanwhile, is thought to have contracted in 2021 linked to lower Indian import levels. Declining exports from West Asia, North Africa and the US were also to blame, eclipsing higher 2021 exports from China.
Globally, finished phosphates capacity is forecast to increase by 3.8 million product tonnes in 2022. largely due to the commissioning of three new projects in Russia, Morocco and Tunisia1 .
Potash: While urea output most likely fell last year, and finished phosphates production flatlined, buoyant potash output bucked the general market trend. Indeed, strong year-on-year growth in world muriate of potash (MOP) production and trade is now predicted for 2021 in response to record levels of demand. Looking ahead, however, the imposition of draconian sanctions on Belarus remains a significant potash market risk.
World potash capacity is forecast to rise by 3.1 million tonnes (K2 O) during 2021 and 2022, with 1.6 million tonnes of this additional capacity likely to be commissioned this year. Expansion projects over this two-year period look set to increase global potash capacity to just under 66 million nutrient tonnes. Growth in 2021 was driven by new capacity in Belarus, Russia, Laos and China, while the expansions forecast for this year centre on Russia supplemented by smaller expansions in Canada and Jordan1 .
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