Why fertilizer prices are going through the roof

By Liam O'Neill

There are many reasons for the huge increase in fertilizer price at the moment.

Increased demand for fertilizer arose from increased acreage coming into production worldwide, and the need for higher potential productivity from agriculture.

The market for fertilizers rose around the world as developing countries changed their diets and farming practices. Increasing affluence in these developing countries saw a shift towards meat, fruit and vegetables. With 1kg of pork requiring 3kg of ration and 1kg of beef requiring 8kg of ration, these changes resulted in an increased demand for grain.

Global planting of cereals rose to respond to the increased demand for food. Producers responded by increasing fertilizer usage to boost yields. Higher product prices justified the increased use of fertilizer.

Added to these factors is the fact that countries with an availability of raw materials are increasingly adopting a protectionist view of their resources - with China, for instance, currently imposing tariffs ranging from 130% to 175% on fertilizers exports. In India, the government has a fertilizer subsidy in place for its farmers of US$28bn, up from US$4bn last year.

Historically, a lack of profit from plants and mines resulted in capacity being taken out of the industry. This is also contributing to the unprecedented rise in fertilizer costs. As if all that was not enough, the price of oil and commodities, exploding populations and burgeoning shipping costs are poised to keep fertilizer prices buoyant for the immediate future.

PRICES

Increased prices have focused farmers' minds on fertilizer application and soil fertility. In order to protect farmers' incomes, increased prices have influenced and lessened the total usage this year, and will again next year.

Weather conditions also played a part in reducing usage in Ireland during the current year.

Therefore, Irish market volumes are down 15% on 2007, with the Irish market now at around 1.1m tonnes of nutrients - 0.7% of the global nutrient market.

The global demand for fertilizer has risen by 4.1% to 169.4m tonnes for the year to May 2008, with potash up 6%, nitrogen up 4% and phosphate up 3%.

According to the International Fertilizer Industry Association (IFIA), demand for fertilizer is expected to increase by around 3% annually over the next five years (see Figure 1). Growth in western Europe is forecasted at 0.6% in 2009.

This surge in demand resulted in supply issues, which made for an increase in price.

Based on figures from the IFIA, it must be emphasised that there is sufficient supply of N, P and K to meet demand. Despite this, plant outages, government policy and delays in commissioning plants could tighten supply in the short term.

It takes four years to have a phosphate source up and running, and five years for a potash operation. According to the IFIA, there are sufficient resources globally to meet supply for several generations to come.

Contrast this situation with the mid-1980s, when demand was moderate, prices were stable and there was a surplus capacity in the industry.

There was little interest in investing in the industry then, as it was fragmented and there was a lack of profitability. This resulted in plants being taken out of production. Aging equipment was also a factor. As a result, there is no fertilizer manufacturing facility on the island of Ireland.

A more positive outlook in 2004 has led to some investment in the industry but the rapid growth in demand from 2007 did not leave sufficient time to build plants.

Current global demand can be met from existing plants, and mid-term demand is sure to be catered for when the new fertilizer plants come on stream. It is worth noting that half of the 50 nitrogen plants being built worldwide at the moment are in China.

The Irish fertilizer industry today consists of blending and packaging operations. The players include Gouldings, Target, Agrifert, Grassland Kilkenny and Grassland. Raw materials are imported from companies such as Yara (Norwegian), K+S (German), Mosaic (American), Agrium and PCS (Canadian). All these have seen significant improvements to their trading performances.

Table 1: Financial analysis

	6 months to 30/06/2008 €m	6 months to 30/06/2007 €m	% change
K+S Group
Revenue	2,397.5	1,723.3	39.1%
Operating profit	552.7	172.7	220.0%
Operating profit margin	23.1%	10.0%
Yara Group	€m	€m	% change
Revenue	5,547.3	3,344.1	65.9%
Operating profit	957.0	294.2	225.3%
Operating profit margin	17.3%	8.8%
Mosaic	12 mths to 31/05/2008 US $	12 mths to 31/05/2007 US $	% change
Revenue	9,812.6	5,773.7	70.0%
Operating profit	2,806.7	616.3	355.4%
Operating profit margin	28.6%	10.7%

Note: the above results have not been adjusted for acquisition or disposals.

K+S Group

This German-based producer of fertilizer - mainly potash - reported sales of €2.4bn for the six months to 30 June 2008, up 39%.

According to company spokeswoman, Julia Ernst, K+S is the fourth largest producer of potash in the world, mining about eight million tonnes of product per year, which is then processed into mineral fertilizers for agriculture and industry. It operates six potash and magnesium mines in Germany.

Some 70% of its sales are in Europe which contributed the bulk of its massive €311.1m profits reported for the six months to last June. This represents a colossal 176.5% rise in profits.

Potash and magnesium products make up 47% of the company's revenue. The division contributed €1.1bn to revenue in this period, up 60% on the previous year, while operating profits within the division rose by 325% to €462.3m.

In 2007, the price of muriate of potash rose by US$200 to around US$400 per tonne, including freight. According to Ernst, present market indications are that the price will be US$1,000 per tonne by the year end.

This price has already been applied in some countries exporting potash.

Ironically, despite the boom in fertilizer sales, the K+S share price has fallen from a high of €97 to €64 at close of trade on Tuesday, perhaps signalling a view of some change for the future.

Table 1 shows the significant improvement in results this year, which, according to Ernst, are "its best results so far''.

Yara

The Norwegian based fertilizer group is the world's largest supplier of mineral fertilizers and claims to be the number one producer of ammonia, nitrates and NPK.

In 2007, it handled 25m tonnes of product. Currently based on revenues, it is the number one fertilizer company in the world.

It has operations in close to 50 countries, and sells to over 120 countries.

Last year, its market share was 7%. Its aim is to have 10% of the global fertilizer market by the end of the current year. In July, Yara bought the nitrogen division of Mosaic which strengthened its position in the North American market. For the half year to June 2008, it reported record sales of €5.5bn, up 66%. However, results for the previous period did not include Kemira GrowHow, another fertilizer company that it bought in late 2007. Kemira showed sales of €684m for the half year to June 2007 and annually it handled 4m tons of fertilizer. Yara's operating profits rose by 225% to €957m, while the higher margins are mainly as a result of the higher prices for fertilizers. Shares in Yara are currently trading at around €32, down from its year high of close on €59.

Mosaic

This Minnesota-based company claims to be one of the world's leading suppliers of Potash and Phosphates. It mined 7.9m tonnes of potash and 8.9m tonnes of phosphate in North America for the year ended May 2008.

It claims to be the world's largest producer of finished phosphates, with a capacity of 10.3m tonnes. Its largest phosphate mines are located in Florida and Louisiana, while it operates three potash mines in Canada and two in the US. It also had a presence in the nitrogen market, but sold its plant to Yara in July for US$1.6bn.

For the year ended 31 May 2008, it reported sales of US$9.8bn, up 70%. Its operating profits came in at US$2.8bn, up 355.4%.

Again the price of its shares peaked in June at US$163. Share price dropped US$10 on Tuesday to close at US$77.

A year ago its share was trading at around US $42.

Approximately 55% of its sales of phosphate and potash are outside of North America.

The company was formed in late 2004 with the merger of Cargill Crop Nutrition and IMC Global. It employees 7,400 people worldwide.

The company claims to have 14% of the global phosphate capacity and 15% of the global potash capacity.