With Yara reporting a 74% rise in operating profits, along with a 16% improvement in underlying profits (EBITDA) for its third quarter, farmers would be right to ask where fertiliser prices are headed in the coming months.
The increased performance at the world’s largest nitrogen producer was attributed to higher sales prices which more than offset increased energy costs.
As a result, operating margins expanded from 2.9% to 4.3% in the three-month period.
Investors who have seen their shares rise 25% over the last six months will certainly be pleased with this announcement.
But what does it mean for farmers who may be thinking of buying fertiliser now for next spring? While never easy to project, as application is still four of five months away it is interesting to delve into the dynamics of global fertiliser markets to understand where markets may be heading.
Current drivers of fertiliser prices
Global grain markets are tightening. This is mainly driven by the US which has seen a modest production deficit this (2017/18) season.
The US Department of Agriculture is forecasting an increased deficit for the coming (2018/19) season. This is resulting in lower grain stocks.
The key measure of grain stock-to-use ratio is down nine days to 82 days of consumption from the start of the season. This has driven grain prices upwards.
The Food and Agriculture Organization (FAO) grain price index is up 6% compared with this time last year and is now equal to the five-year average. Therefore, the improved grain prices are expected to support fertiliser demand.
With some 80% of the cost of producing a tonne of nitrogen (ammonia) fertiliser tied up in energy costs, shifts in global energy prices have an effect on fertiliser prices.
Gas prices have increased in many regions including Europe, and look set to stay high through this winter.
Spot gas prices are 50% higher in Europe compared with this time last year. Yara itself has seen an almost 40% rise in its average gas costs globally in the last three months compared with the same period last year.
The reason for the hike in gas prices is threefold - depleted gas stores brought on by the Beast from the East and the coldest winter across Europe since 2012 and; strong demand in China is redirecting supplies out of Europe; and, finally, the cost of European emissions permits has more than doubled this year, tilting the economics of power generation away from more polluting coal units and toward cleaner generators burning gas.
Stronger crude oil prices, which have fallen back to just under $70/barrel, are probably also providing strength to energy markets. So it looks likely that gas prices in Europe will stay strong through the winter and the higher natural gas prices have raised the cost floor for producers in Europe.
China is one of the largest producers and users of nitrogen and it is not exporting.
This year to August, China exported only 25% of what it exported for the same period last year.
Chinese production rates are below the level of last year, due to a curtailment in energy (mainly coal) to produce it. But despite global fertiliser prices increasing to a level where Chinese exports should again have become attractive export, China has needed to keep all its production for itself helping to support global urea prices.
A lack of Chinese exports and active buying through public tenders in India, Pakistan, Bangladesh and Ethiopia, on top of demand from private markets, has lifted global urea demand.
For example, Egyptian granular urea has traded 25% higher over the last three months compared with the same period last year and has risen more sharply in recent weeks.
A lack of Chinese exports and active buying through public tenders in India, Pakistan, Bangladesh and Ethiopia, on top of demand from private markets, has lifted global urea demand
This, combined with increased gas prices, has given support to European ammonia (a key component in the manufacture of CAN) prices. Over the last three months, prices have risen 50% compared with the same period last year.
Phosphate prices also look strong and are up around 25% over the last three months compared with the same period last year. This is as a result of strong global demand and a major production outage in Florida.
In addition, Chinese exporters have raised the price at which they are willing to export, partly due to higher production costs.
The global nitrogen supply-demand balance is tipping in favour of the manufacturer.
Nitrogen supply growth is forecast to decline after 2018, and lead times for new factories can be up to five years. Meanwhile, demand growth is expected to pick up compared with the last three years, as global grain stocks are relatively low.
Coupled with energy prices strengthening, it looks like we may be entering a period of increased fertiliser prices.