Fertilizer International 512 Jan-Feb 2023
31 January 2023
A return to market stability?
“When geopolitics meets fertilizer markets, things get bumpy for fertilizers. That is exactly what has happened over the past two years.”
After two turbulent years, could the fertilizer market finally start to stabilise in 2023? Well, that’s what Dutch agricultural finance house Rabobank is predicting…
Fertilizer consumption suffered in 2022 due to extreme market volatility and, at times, astronomical prices. Yet, with signs of fertilizer prices moving lower in 2023, a recovery in consumption in some regions is possible this year, according to Rabobank’s latest fertilizer outlook1 .
“When geopolitics meets fertilizer markets, things get bumpy for fertilizers. That is exactly what has happened over the past two years, with tensions peaking after the invasion of Ukraine. But for 2023, we can expect things to settle somewhat,” comments the outlook’s lead author Bruno Fonseca, senior analyst for farm inputs at Rabobank.
In his view, fertilizer price movements in recent months, and corresponding changes to affordability, resemble patterns seen in the past.
“History repeats itself. That becomes more evident when we explore historical trends in the affordability index over time,” said Fonseca.
Rabobank’s fertilizer affordability index is a measure of farmer buying power. It works by benchmarking the price of a basket of fertilizer products against the price of a basket of agricultural commodities.
The bank’s latest analysis suggests that fertilizer affordability is following a broad historical cycle that on average peaks every three years. Because of this, Rabobank expects to see fertilizer affordability improve in coming months – if its trajectory in 2023 matches the strongly cyclical pattern seen since the 2008 global financial crisis.
“The [fertilizer affordability] index’s moving average is trending lower, as fertilizer prices are returning to pre-war levels. For the next three months, the index will continue to trend downward but remain above normal,” Fonseca commented at the end of November. He noted, however, that Europe’s natural gas crisis could potentially keep the index higher – i.e., less affordable – by making urea and ammonia more expensive.
Nitrogen fertilizers have experienced the highest price swings of the last 12 months due to their reliance on natural gas as a feedstock. Rabobank reports that annual urea price volatility, as of mid-October 2022, was above 60 percent – more than triple its five-year average.
“As long as the natural gas crisis in Europe lasts, volatility in the nitrogen-based fertilizer market will persist, with weeks of stronger demand pushing prices higher and weaker weeks pushing prices lower,” Rabobank reports.
Phosphate fertilizer prices, meanwhile, are currently trending lower. This is linked to the demand destruction caused by record phosphate prices earlier in 2022. High phosphate production costs should, however, provide a floor and prevent large price decreases. The potential for phosphate price volatility in 2023 also remains due to logistics risks and potentially adverse weather affecting field applications.
The 2022 potash market price spike also destroyed demand, although consumption is recovering now that prices are moving lower. Nonetheless, the reconfiguration of global supply needed to keep potash exports from Belarus and Russia flowing (see our full article on page 50) will still pressurise prices in 2023.
The high commodity prices of the past two years have broadly benefitted agricultural producers, Rabobank reports, by generating outstanding returns and strengthening working capital. Margins will remain positive in 2023, although they will be down on the previous two years due to higher input costs.
Fertilizer buying in 2023 is likely to remain robust despite this cost squeeze, concludes Rabobank.
“With strong working capital and positive margins, [agricultural] producers will make minimum cuts to inputs,” predicts Fonseca. “Their objective is to maximize yields, and that is not accomplished by cutting back inputs – particularly fertilizers.”
Yet history doesn’t always repeat itself, does it? As the popularity of the word ‘unprecedented’ in 2022 proves.
The last three years have each been scarred by a set of very different global disruptors – a worldwide pandemic, a breakdown in inter-regional supply chains, a surprise war in Europe – so emerging signs of stability in 2023 will be warmly welcomed.
