The year ahead – a market exposed to global risks

2024 MARKET OUTLOOK

The year ahead – a market exposed to global risks

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 2024.

The Royal Navy’s HMS Monmouth conducting counter piracy operations in the Middle East. The Times has highlighted Houthi rebel attacks on Red Sea shipping as an emerging risk to commodity prices, freight rates and the global economy.

PHOTO: UK MINISTRY OF DEFENCE

Growth slows, inflation falls and risks abound

Global growth has been uneven and continues to remain below trend, according to the IMF, with the “global economy limping along, not sprinting”, in its view.

The IMF expects world economic growth to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, well below the 2000–2019 average of 3.8 percent. The outlook for inflation is improving, though, with rates declining after the inflationary shock of 2022. The IMF expects global inflation to fall back this year – as tighter monetary policy and lower international commodity prices take effect – with rates slowing from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024.

“The global economy continues to recover slowly from the blows of the pandemic, Russia’s invasion of Ukraine, and the cost-of-living crisis. In retrospect, the resilience has been remarkable. Despite the disruption in energy and food markets caused by the war, and the unprecedented tightening of global monetary conditions to combat decades-high inflation, the global economy has slowed, but not stalled. Yet growth remains slow and uneven, with growing global divergences. The global economy is limping along, not sprinting,” comments Pierre-Olivier Gourinchas, The IMF’s economic counsellor.

His observations are echoed by International Fertilizer Association (IFA) in its latest market outlook1 :

“Fertilizers remain at the intersection of unsettled food and energy markets, and are increasingly exposed to global risks spanning geopolitics, conflict, economics and climate. Supply has been resilient despite existing and fresh local disruptions in 2023, while macroeconomic drivers have grown in influence. Economic pressures stemming from inflation and recession risks have led to rising interest rates globally, which raises the cost of borrowing for governments, companies and consumers.”

Politics to the fore in ’24?

Mehreen Khan, The Times’ economics editor, singles out politics as the biggest downside risk to the global economy in 2024. Political upheavals, alongside three other major risks, are, she says, “filling many with dread” about economic prospects for the next 12 months2 .

“The first [risk] is politics. A record number of voters in more than 70 countries will go to the polls in what is shaping up to be a landmark global election year. National votes will be held in the US, UK and India; there will be elections for the European parliament, and a trio of regional votes in Germany, to name a few.”

The three other major key economic concerns highlighted by Khan are:

• The US presidential election in November – this being the most significant global political flashpoint of the year.
• A sense of foreboding that something could still break the fragile world economy – with one contender being the recent Houthi rebel attacks on Red Sea cargoes, and their potential spillover for commodity prices, freight rates and global inflation, if they were to close the Suez Canal as a shipping route.
• The final source of trepidation for the year ahead is self-inflicted damage from the over-zealous monetary policy of central banks – a factor that has already brought the Eurozone to the edge of recession, according to The Times.

There are signs that the Suez Canal is already becoming an untenable route. Maersk, for example, suspended shipping through the canal on 3rd January, until further notice, following a Houthi attack on one of its vessels. Other major shipping firms, including Hapag-Lloyd, Evergreen Line and MSC, have also stopped using this critical shipping route due to similar Red Sea attacks by Houthi rebels.

Political risks to the fertilizer market are also singled out by IFA in its shortterm outlook1 :

“Politics will play a significant role in 2024, with almost two billion people in more than 70 countries due to vote in national elections. [Several] topics … on the table in these elections … will have implications for fertilizers. Positions on foreign policy, food security, agricultural subsidies and decarbonisation could spell change for fertilizers in these countries and the global market as a result.”

IFA also highlights the impact of “the higher cost of borrowing, access to credit and depreciating currencies” on affordability “in many importing and fragile markets”1 .

Food prices continue to slide

After near record food prices in 2022 (Fertilizer International 512, p13), the FAO Food Price Index (FFPI) stood at 118.5 points in December 2023, 10 percent (13.3 points) below the level of a year ago. The index averaged 124.0 points last year, some 14 percent lower than the 2022 average.

The FAO’s cereal price index averaged 130.9 points in 2023, down 15 percent (23.8 points) from its record annual average in 2022 – a reflection of well supplied global markets. After falling for four consecutive months in the second half of 2023, wheat export prices rallied in December, supported by tensions in the Black Sea and the weather-related disruptions affecting major exporters. International rice prices, meanwhile, registered a 21 percent annual increase in 2023, largely due to concerns about El Niño’s impact on production and the aftermath of the rice export restrictions imposed by India.

Amid improved global supplies, the vegetable oil price index averaged 126.3 points last year, a sharp 33 percent (61.5 points) fall on the 2022 average and marking a three-year low.

Sugar prices bucked the annual price declines seen for other food commodities, being driven upwards in 2023 by concerns over the tight global sugar balance. The average sugar price index in 2023 averaged 145 points, its highest annual value since 2011 and up 27 percent (30.6 points) on 2022.

Ag commodities – prices to fall and supplies to improve?

Global food commodity prices are set to fall in 2024, predicts Rabobank in its annual outlook. This should help to ease food price inflation in many parts of the world after three years of record highs caused by war, adverse weather and rising energy and input costs.

Rabobank expects across-the-board falls in the global prices of key agricultural commodities including sugar, coffee, corn and soybeans. This should be good news and welcomed by buyers and food consumers. Ag commodity demand is, however, likely to remain weak this year due to slowing economic growth, high inflation and elevated interest rates – despite improving prices and rising supply availability.

Carlos Mera, head of agri commodities at Rabobank, said: “Describing the last three years of global agricultural commodity prices as volatile is an understatement. Producers are still grappling with the after effects of war, adverse weather, high farm input inflation and weak consumer demand, but eyeing 2024 as the return to a semblance of normality.”

He continued: “It won’t be plain sailing but the more positive outlook for the majority of agri commodities should lead to relief for buyers around the world. Governments, businesses, farmers and consumers will all feel beleaguered after a volatile few years”.

Uncertainty will persist for wheat, though – a vital food commodity in developing countries – due to the potential for weather-related disruptions and restrictions on Black Sea exports. Indeed, Rabobank expects, for the fifth year in a row, another deficit in the global wheat market in 2024.

While Russia’s 2024 wheat harvest is likely to stay high (above 87 million tonnes), this expectation remains subject to weather uncertainties and export restrictions. In Ukraine, meanwhile, the continuing effects of the war on wheat production are expected to result in a shrinking exportable surplus.

Southern hemisphere wheat growers are unlikely to provide much relief in the coming months either, with Argentina underperforming and Australia falling well behind its good harvests of the past three years.

The South American agricultural production should return to a healthier position this year and bolster global supplies, forecasts Rabobank. Brazilian farmers, for example, are expected to deliver a 163 million tonne soybean crop in 2024, as La Niña weather conditions gives way to El Niño. Rabobank also expects Argentina, the biggest exporter of soy products, to recover after last year’s crop failure.

Rabobank’s 2024 outlook is also forecasting:

• Global supplies of canola (rapeseed) to recover due to strong Ukrainian plantings and an end to the dry spell in Canada, the world’s largest canola producer
• El Niño to push palm oil supplies short of expectations and support prices
• Vegetable oil demand to continue to grow exponentially driven by ever higher US biofuel sector consumption
• More favourable 2024/25 growing conditions in Thailand to bring down sugar prices from the 12-year high seen in 2023.
• The coffee market to hit a 6.8 million bag surplus in 2024/25, spurred by a recovery in the Brazilian and Colombian arabica crop, although farmers will continue to be squeezed by high input costs, labour shortages and weak consumer demand.

Fertilizer demand

In a welcome respite for farmers, the International Fertilizer Association (IFA) has highlighted the improvement to fertilizer affordability since mid-2022 in its latest demand outlook1 . IFA advises that true farm costs will, however, vary from country-to-country, due to currency depreciation and the effects of higher interest rates on access to credit.

IFA is estimating a modest 2.6 percent rebound in global fertilizer consumption in 2023 to 191.5 million tonnes of nutrients (N + K2 O + P2 O5 ), this being only a part reversal of the sharp 7.6 percent demand contraction seen in the preceding two years (Figure 1).

While world nitrogen consumption in 2023 (109.7 million tonnes N) is expected to exceed pre-pandemic levels, a more muted recovery in phosphorus and potassium demand is likely, according to IFA’s latest outlook. Indeed, global consumption of both these nutrients in 2023 – 46.2 million tonnes P2 O5 and 35.6 million tonnes K2 O – looks set to remain below 2019 levels.

IFA expects the following usage pattern in four key regions to drive up year-on-year (y-o-y) global growth in fertilizer consumption in 2023:

• Increasing N use (43 percent y-o-y) in both East Asia and Eastern Europe & Central Asia
• Increasing P2 O5 use (36 percent y-o-y) in South Asia
• Increasing K2 O use (44 percent y-o-y) in Latin America.

Looking ahead, IFA expects the modest growth in global fertilizer use to continue this year and is forecasting a 2.0 percent y-o-y rise in nutrient use in 2024. A rise by this amount (+3.9 million tonnes to 195.4 million tonnes of nutrients) would, however, finally return global fertilizer consumption to above 2019 levels (Figure 1).

Fig. 1: World fertilizer consumption (nutrient tonnes) and annual growth rate: fertilizer year (FY) 2020-2024

On an individual nutrient basis, nitrogen consumption is expected to grow by 1.7 percent in 2024, while P2 O5 and K2 O consumption look set to grow by 2.0 percent and 3.1 percent, respectively, suggests IFA1 .

While forecasting overall growth in consumption, IFA highlights a number of overarching risks to global fertilizer demand during 2024, particularly:

• Crop economics and fertilizer affordability
• El Niño and unforeseen weather events
• Politics, the economy and government policies
• Conflicts in agricultural centres.

Regionally, the main factors to watch over the next 12 months include:

• The continuing war in Ukraine
• The agricultural impact of El Niño in Latin America, southern Africa and Australasia
• Chinese government monitoring and restriction of fertilizer exports
• Election outcomes and the strength of monsoon rains in India
• The regulation of nitrogen consumption in Europe.

Summing up, IFA’s main conclusions in its short-term outlook are that1 :

• Although fertilizer availability and affordability are much improved, the potential for market disruption remains
• Macroeconomics (and risks) remain the foremost driver of demand
• Agricultural N and P consumption are expected to recover more strongly than K consumption in the short term
• Weather is a big short-term risk as we move from La Niña to El Niño conditions
• Policies on food security and nutrient use efficiency (NUE) are becoming increasingly important drivers of fertilizer use.

Fertilizer supply

IFA currently uses a supply metric known as ‘capability’. This estimates actual fertilizer supply by combining announced production capacity developments with a set of assumptions for disruptions to production output in affected countries1 . Supply capability factors in the impact of the following world events on the global fertilizer market:

• The evolution of Russia’s war in Ukraine
• Sanctions placed on Russia and Belarus
• The logistical ability of both Russia and Belarus to export fertilizers
• The introduction of protectionist policies curbing exports from key fertilizer exporting countries such as China.

IFA is currently forecasting the following fertilizer supply changes for the two years 2023-20241 :

• A four percent increase in nitrogen capability from 156.5 million tonnes to 162.1 million tonnes N – driven by low-cost projects in Russia and the US, the displacement of imports from the ramp up of new plants in India, and a return to production growth in China.
• A 12 percent increase in phosphate capability from 51.1 million tonnes to 53.4 million tonnes P2 O5 – mainly driven by a return to pre-pandemic production in North Africa and the ramp up of recently commissioned production capacity in West Asia.
• A 10 percent increase in potash capability from 46.2 million tonnes to 50.8 million tonnes K2 O – based on production capacity additions in Laos and Russia, continued Belarussian export recovery via alternative routes, and higher operating rates in Russia in response to higher demand.

In terms of individual commodities, IFA makes the following global supply projections for 2023 versus 2022:

• Urea: Increased production (+3.6%) to 190 million tonnes and falling trade (-4.3%) to 51 million tonnes.
• Monoammonium phosphate and diammonium phosphate (DAP/MAP): Falls in both production (-0.7%) to 63 million tonnes and trade (-3.2%) to 26 million tonnes.
• Muriate of potash (MOP): Higher production (+5.1%) to 65 million tonnes and an increase in trade (+9.0%) to 50 million tonnes.

Fertilizer purchasing boost in 2024?

Rabobank is forecasting annual rises in fertilizers purchases – of around three percent in 2023 and five percent in 2024 – in its latest global fertilizer market outlook. This follows a seven percent contraction in global purchases in 20223 .

“These figures align with our affordability index, which shows much better conditions for purchasing fertilizers than a year ago,” says Bruno Fonseca, senior analyst for farm inputs at Rabobank. “The index’s movements confirm our expectation of usage growth in 2023, with nitrogen growing two percent phosphate 3.9 percent, and potash five percent.”

The outlook for potash and phosphate is positive, according to Rabobank, while the nitrogen market, in contrast, is facing challenges due to lower fertilizer demand from corn and wheat growers and production uncertainties.

“As winter approaches in Europe, there is more uncertainty in the natural gas market and related uncertainty in the production cost of nitrogen fertilizers,” comments Fonseca.

The arrival of El Niño is expected to disrupt grain and oilseed markets, following the good Brazilian and the US harvests of recent years.

Potash, meanwhile, is going through a period of ample supply, while the phosphate market is also on the rise, suggests Rabobank, due to the return of Chinese MAP/DAP exports.

Finally, the Israel-Hamas war could widen to negatively affect global fertilizer markets this year, warns Rabobank. Israel is a sizable supplier of phosphate and potash, accounting for around three percent of phosphate exports and eight percent of potash exports globally. The impact of the conflict is, however, only marginal currently.

References

1. Cross, L., & Gruere, A., 2023. Short-Term Fertilizer Outlook 2023-2024. Public Summary. IFA Market Intelligence Service, December 2023. International Fertilizer Association, Paris.

2. Khan, M., 2023. Pirate threat to UK’s war on inflation. The Times, 26 December 2023.

2. Fonseca, B., 2023. Semiannual fertilizer outlook. Rabobank, October 2023.