Prices of nearly all fertilizer products have increased to record or near

Transcription

1 Volume 19, Number 1 Fall Fundamental Force Prices of nearly all fertilizer products have increased to record or near record levels in most markets around the globe this year. Price moves of this magnitude typically are not the result of a single factor but rather the consequence of a combination of fundamentals all pulling or pushing in the same direction. Call it fundamental force. Such a force has lifted prices this year. World nutrient demand, after going dormant for five years, finally is growing again. Raw materials costs continue to escalate. And recordhigh energy prices have jolted both plant operating and transportation costs. Recovery in World Nutrient Demand Recent statistics indicate that a broad-based recovery in global nutrient demand is underway, driven by improved on-farm economics in most regions of the world. According to estimates released by the International Fertilizer Industry Association (IFA) in June, world nutrient use jumped 3 percent or. million metric tonnes (mmt) to MMT World Nutrient Demand 3.9 mmt in and then increased another percent or 1 Source: IFA. 3. mmt to a record.1 mmt in IFA projects that world nutrient use will increase another 3 percent or.3 mmt to 11. mmt this year. If the IFA demand forecasts are on target, world nutrient use will have increased Nitrogen Phosphate Potash percent or 1.1 mmt during the last three years. Of that total, nitrogen, phosphate and potash will account for.1 mmt, 3. mmt and. mmt, respectively. The current recovery is broad-based. IFA statistics show that nine of 13 regions registered increases in nutrient use in 3. Forecasts for indicate that 11 of 13 regions likely will register increases this year. Brazil, however, is the engine powering growth. Brazil accounted for 31 percent of the increase in global nutrient use during the last two years. Higher soybean prices, amplified by a depreciated real, has provided a super-charged stimulus to Brazil s export-oriented agricultural sector. Nutrient use increased 1 percent in and then surged 3 percent 9. mmt in 3. Demand growth is forecast to moderate to just one to two percent this year due to the drop in soybean prices and a sharp increase in farm input costs. Rising Raw Materials Costs Rising raw materials costs particularly the sharp increase in North American natural gas prices as well as the recent escalation in U.S. phosphate rock costs also have pressured global nitrogen and phosphate prices. U.S. natural gas prices have nearly tripled during the last five years. The jump in gas costs has forced the permanent closure of approximately one dozen U.S. nitrogen plants and the indefinite idling of more than one-half dozen others during the past few years. As a consequence, U.S. gross ammonia production has declined 33 percent or. million tons from a peak of 1.1 million tons during the late-199s to 1.1 million tons in 3/. Despite this sharp drop, the United States still ranked as the fourth largest nitrogen producer last year behind China, India and Russia, according to IFA statistics.

2 MST U.S. Ammonia Production Source: TFI and Cargill Fertilizer Year Ending June 3 U.S. Natural Gas Prices US $ MM Btu Henry Hub Daily Cash Price Index 1 11 Source: Enerdata YYMM World nitrogen producers are pressing to meet the increase in global demand as well as to fill the growing gap between U.S. demand and supply. As a result, North American gas prices will put a floor under world nitrogen values until enough new facilities are built to displace additional U.S. capacity or until domestic producers convert to lower cost feedstocks such as imported liquefied natural gas (LNG) or coal. The run-up in natural gas prices is the most dramatic and visible of the increases in raw materials costs, but it is not the only one. Significant increases in U.S. phosphate rock costs during the past few $ ST U.S. Phosphate Rock fob Mine Cost years also have pressured Source: TFI. world phosphate prices. For example, The Fertilizer 1 Institute s (TFI) 3 cost 1 of production survey showed that the average fob mine Cash Cost Non Cash Cost cost of rock was $.1 per ton, an increase of 1 percent or $ per ton since 199. That has added approximately $1 to the U.S. industry s average unit cost of DAP during this period. Record Energy Costs Fertilizer production is energy intensive and geographically concentrated often in remote areas near key natural resources. As a result, the recent run-up in energy prices has increased both plant operating costs as well as the costs to transport fertilizer from one corner of the globe to another. The charts below plot the spring price of key fertilizer products at Midwest retail plants and the price of oil during the second quarter for each year from 19 to. Many factors impact retail fertilizer prices, but these charts show that energy and fertilizer prices are correlated. Although there is significant unexplained variation, the price of oil explains to percent of the variation in the prices of these fertilizer products. $ ST U.S. Retail Urea Price vs. Oil $ bbl Midwest Dealer Spring Price Source: USDA and NYMEX. 9 9 Urea WTI Crude $ ST U.S. Retail DAP Price vs. Oil $ bbl Midwest Dealer Spring Price Source: USDA and NYMEX. 9 9 DAP WTI Crude $ Ton Urea Prices 3 Source: Green Markets, Fertecon and USDA Nola Barge ($ST) Black Sea Vessel ($MT) Midwest Retail ($ST) The lines on these charts show the quarterly averages of prices published each week for the major fertilizer products at key domestic and international pricing points. The dots illustrate the retail price for these products at Midwest retail plants during the second quarter of the year. The U.S. Department of Agriculture currently surveys retail dealers and publishes average prices by region each April. $ Ton Granular Potash Prices Source: Green Markets, Decyfer and USDA Midwest Warehouse ($ST) Midwest Retail ($ST) Brazil c&f ($MT) That stands to reason. Transportation and distribution costs can account for as much as one half of the total cost farmers pay for fertilizer in some parts of the world. China s voracious appetite for all commodities has spiked ocean freight, but rising energy costs also have contributed to the higher rates. Sharp increases in oil prices have resulted in frequent and large fuel surcharges on U.S. rail and truck rates. $ ST U.S. Retail Potash Price vs. Oil Midwest Dealer Spring Price $ bbl 19 Source: USDA and NYMEX MOP WTI Crude $ Ton DAP Prices 3 Source: Green Markets, Fertecon and USDA Central Florida Rail ($ST) Tampa Vessel ($MT) Midwest Retail ($ST) Nitrogen Prices Move Higher Fundamental force has propelled nitrogen prices to record or near-record MMT World Urea Import Demand 3 highs this year. International urea prices set mod- Source: Fertecon and Cargill ern day records last summer as a result of strong 1 1 seasonal demand from the southern hemisphere, Asia Europe North America Latin America Other stubbornly high North MST N U.S. Nitrogen Imports Percent American natural gas Source: U.S. Dept. of Commerce. 1 prices and a number of 1 planned and unplanned production outages scattered around the globe. 1 1 World ammonia prices also Fertilizer Year Ending June 3 Net Imports Total Use Imports as Percent of Use climbed to their highest level in recent history as a result of record U.S. imports. Demand growth is one part of the force equation. Urea import demand increased 1 percent or. mmt to a record.3 mmt in calendar year 3. U.S. imports increased percent or 1.1 mmt last year, but imports by other buyers also increased a respectable six percent or 1.

3 MST U.S. Ammonia Imports from Offshore Sources Source: U.S. Dept. of Commerce via TFI Fertilizer Year Ending June 3 mmt in 3. Major buyers such as Brazil, Mexico, Thailand and Australia imported record volumes last year in order to meet strong demand. Filling the gaping hole created by the dramatic drop MST U.S. Urea Imports from Offshore Sources. Source: U.S. Dept. of Commerce via TFI Fertilizer Year Ending June 3 MST U.S. Nitrogen Solution Imports from Offshore Sources. Source: U.S. Dept. of Commerce via TFI Fertilizer Year Ending June 3 in U.S. nitrogen production is the other part of the equation. U.S. net imports of nitrogen totaled.1 million tons N and accounted for more than one-half of total agricultural and industrial use during the 3/ fertilizer year. That is up from the 1 percent range just 1 years ago. Nitrogen flowed into the United States in all forms. The United States imported record volumes of ammonia and near record volumes of both urea and nitrogen solutions in 3/. Phosphate Margins and Prices Recover Phosphate margins and prices have recovered this year from the long and severe cyclical downturn of the previous four and one-half years. DAP prices have climbed to levels slightly less than the peaks of the mid-199s and DAP margins have increased markedly but remain significantly less than the peak and average levels of the last half of the 199s. Fundamentals have improved this year. Stocks of DAP and MAP held by U.S. producers at on- and off-site facilities on July 31 totaled just 931, tons, the lowest level in recent history and 13 percent or, tons less than a year earlier and 1 percent or 19, tons less than the three-year average for that date. DAP and MAP stocks held by U.S. producers at on-site facilities at month-end generally were less than the MMT Processed Phosphate Imports Source: Fertecon and Cargill Asia Latin America West Europe Oceania Other Oceania.% Processed Phosphate Import Demand 1999 and 3 Source: IFA. W Europe 1.9% Other 11.3% Latin America 1.1% Asia 9.% Oceania.% Other.1% 1999 W 3 Europe 1.% Latin America.% Asia 3.3% Phosphate trade is inching up, but the geographic mix of shipments today is much different and more balanced than that of five years ago. The recent boom in shipments to Latin America has offset the continued erosion of sales to Asia. Asia accounted for almost one-half of processed phosphate imports in 1999 but just slightly more than one-third last year. The Latin American market has grown into the second largest destination for processed phosphate exports, accounting for percent of the total in 3 and up from just 1 percent five years earlier. three-year average and were at the low end or even below the 1-year range throughout the entire 3/ fertilizer year. Escalating raw materials and plant operating costs have pushed up prices, but the recent growth in global demand also has helped to pull up phosphate margins and prices. Although a large share of the recent growth in phosphate use was met by new capacity in China, India and Australia, the recovery has caused import demand to creep upward during the past couple of years. For example, import demand for processed phosphate (DAP, MAP and TSP) increased 3 DAP and MAP Stocks Held by U.S. Producers 1 ST At On- and Off-Site Facilities July 31 Source: TFI Stocks 3-year Average DAP and MAP Stocks Held by U.S. Producers 1 ST At On-Site Facilities Month-End Source: TFI. JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN Min/Max Range (93/9-/3) 3/ 3-year Average percent or more than one-half million tonnes from.3 million in to.9 million in 3. Import demand is projected to increase slightly to 1. million tonnes this year. U.S. producers are beginning to benefit from the modest recovery in import demand. After increasing from 9. mmt in to 9.3 mmt in 3, U.S. exports of processed phosphate are projected to increase to 9. mmt this year. Potash Market Awakens Potash prices at all links in the supply chain have surged to record levels this year. Potash fundamentals are tight. Stocks held by North American producers at on- and off-site facilities on July 31 were the lowest in modern history and were 31, tons K O less than the three-year average for that date. In fact, the chart shows that MMT K month-end stocks were significantly O World Potash Import Demand Source: IFA and Cargill. less than the three-year average and at or below the 1-year range throughout 3/ especially during the last few months Asia North America Latin America Europe Other of the fertilizer year. Strong demand from both domestic and international buyers has tightened the global potash market and pulled up prices. Import demand jumped 11 percent to a record 3. million tonnes K O in calendar year 3. Imports by Brazil surged 3 Potash Stocks Held by North American Producers 1 ST K O on July Stocks 3-year Average 3 Potash Stocks Held by North American Producers 1 ST K O at Month End JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN Min/Max Range (93/9-/3) 3/ 3-year Average

4 MST K O North American Potash Shipments Fertilizer year ending June 3 Domestic Offshore MST K O North American Potash Production 1 Percent Fertilizer year ending June 3 Canada US Op Rate percent in 3, but import demand outside Brazil increased a solid seven percent last year. Shipments remain robust this year with North American exports up more than 11 percent during the first seven months of. The surge in demand coupled with the fact that most global competitors are running at or near capacity has enabled North American producers to capture a large share of this growth and ship record volumes. For example, shipments by North American producers to domestic and offshore customers jumped 1 percent or 1. million tons to a record 13.3 million tons K O during the 3/ fertilizer year. North American producers met this surge in shipments by stepping up production and drawing down inventories at an even faster rate than a year earlier. North American production increased 13 percent or 1. million tons to 1. million tons K O during 3/. Operating rates increased eight percentage points to percent of capacity last year, the highest rate since 199/9. North American stocks dropped, tons K O during the 3/ fertilizer year, 3, tons more than the draw-down in /3. Caution Flags Fundamental force has lifted fertilizer prices this year. But crop nutrient markets are global, cyclical and commodity markets. The industry has not mutated into a public utility. Fertilizer prices will come down as market players react to this force. A few caution flags have emerged already. Grain and oilseed prices have dropped sharply since the peaks of last April. The nearby prices of corn, soybeans and wheat have declined approximately 3 percent, percent and 1 percent, respectively, since last spring. Markets are fixated on and spooked by the size of the crop expected to come off fields this fall. But the record harvest is not expected to increase stocks significantly. For example, the U.S. Department of Agriculture (USDA) projected that grain stocks outside of China will increase 1 percent or mmt in /. That modest build-up follows a two-year Mil Bu U.S. Corn Stocks Percent Source: USDA Stocks Percent of Use 1 MMT World Grain Stocks Excluding China Percent Source: USDA Stocks Percent of Use draw down of mmt, the largest two-year decline since the mid-19s. These statistics exclude China because reliable estimates of domestic grain stocks either do not exist or are a closely guarded state secret. However, grain use has exceeded production during the last five years in China. Most analysts estimate that China s grain stocks will decline from 3 to 3 mmt in /, more than offsetting the increase in the rest of the world. Recent increases in imports and an urgent government initiative to study food security are consistent with declining grain stocks. The U.S. corn crop will shatter the previous record set just a year earlier, but also will not boost stocks significantly. USDA estimates that U.S. farmers will harvest 1.9 billion bushels of corn this fall, topping the old record by percent or more than million bushels. U.S. corn stocks, however, are projected to increase only million bushels in /. Steady feed use, impressive gains in food, industrial and seed uses, and a rebound in exports result in a record projected use of 1. billion bushels in /. The sharp increases in fertilizer as well as fuel, seed and crop protection chemicals costs combined with the recent decline in grain and oilseed prices threaten on-farm profitability. However, the record harvest this fall simply will halt but not reverse the unsustainable trends in grain and oilseed markets of the past few years. Nutrient demand prospects remain healthy. Another flag is the torrid pace of fertilizer shipments this year. Brazil is a good example. Nutrient use this year is forecast to increase one to two percent following the 3 percent surge in 3. Yet Brazilian imports of monoammonium phosphate (MAP) and potash during the first seven months of increased percent and percent, respectively. Buyers stepped up to the plate early in order to beat the next expected price increase and to avoid port congestion and demurrage costs that plagued importers last year. The fundamental force that has lifted fertilizer prices to record or near record levels has lost little power. A record harvest will not boost global grain and oilseed stocks appreciably and nutrient demand prospects still remain positive. A break in raw materials costs looks unlikely, especially in the case of North American natural gas prices. New nitrogen plants are under construction today, but the big slug of new capacity still is one to two years out. Oil prices hit record highs in August making $ per barrel oil look like a bargain today. Fundamental force eventually will lose momentum, but more time is required to realize the inevitable adjustments.

5 Cargill News The Last Chapter by Michael R. Rahm, Vice President and Senior Economist This is the last issue of Applications. It was a good run 19 years and 39 issues. Before looking ahead to The Mosaic Company, a look back at the evolution of Applications may be of interest to some readers. Applications was born as a result of an internal wire I received from my first boss, a gentleman by the name of Glen Magnuson, a few weeks after I joined Cargill in September 19. (Prior to the development of current systems, Cargill utilized an internal wire communications network that linked together all Cargill offices around the world). The wire, whose subject line read Thots While Shaving, suggested the development of a market newsletter for customers and suppliers that Cargill would distribute at industry conferences. The first issue was published in February 19 and was distributed at the TFI Annual Marketing Meeting that month. The 19 issue reviewed provisions of the newly passed U.S. farm bill and detailed features of the commodity programs. It also described Cargill s acquisition of percent interest in a Florida phosphate producer called Gardinier, Inc. and introduced the recently formed Fertilizer Division s youthful-looking president, a fellow by the name of Fredric W. Fritz Corrigan. It was a humble beginning and some might argue that we had much to be humble about! But it was a beginning and we kept at it. During the following years, Applications evolved into a reliable medium to communicate to customers and suppliers our views of grain and crop nutrient markets, to analyze policy issues important to the fertilizer industry and to tell readers about Cargill Crop Nutrition. Our views of grain and fertilizer markets were not always correct, but they were unbiased and incorporated our best analytical efforts. There were bullish times. The Fall 199 issue proclaimed A New Ballgame reflecting the expectation that significant declines in world grain and oilseed stocks would fuel nutrient demand growth. There were bearish times. The Fall 1999 issue declared the Death of the Phosphate Bull Market as a result of a slowdown in global demand and the expected start-up of new capacity. Policy analysis provided the most stimulating research opportunities. Applications addressed head on a long list of issues important to the fertilizer industry including LISA (Low Input Sustainable Agriculture), the development of new risk management tools such as fertilizer futures contracts, de-coupling features of U.S. farm programs, Indian fertilizer subsidies, fertilizer trade issues with China, the collapse of nutrient demand in the former Soviet Union, the impact of exchange rates on fertilizer markets and trade, and the transition of the world nitrogen industry resulting from changes in relative energy prices. Cargill often is perceived as a highly secretive organization, but readers of Applications could learn a lot about the Cargill Crop Nutrition businesses by scanning the Cargill News section of each issue. This section highlighted investments from the construction of blend plants in South America to the major phosphate acquisitions and chronicled the impressive growth of Cargill Crop Nutrition since 19. This indeed is the last chapter for Applications. Looking ahead to The Mosaic Company, we will incorporate the lessons learned from the last 19 years of Applications into a new, more useful and more interesting book. As Mike puts the finishing touches on this final issue of Applications, I want to publicly recognize him for his significant contribution to the global crop nutrition industry's knowledge, insights, and understanding of fertilizer market fundamentals. Perhaps his views have helped in a small way position your company during the many years that Applications has appeared under your door at the TFI conferences. We at Cargill hope so, and thank Mike for his continuing well-grounded assessments of fertilizer markets and how they work. Rest assured that while Applications ends with this issue, it will resurface in another form under the Mosaic banner in the near future. Thanks, Mike. Fredric W. Fritz Corrigan

6 Cargill News Cargill Acquires Wingate Creek Mine On March, Cargill Crop Nutrition acquired the phosphate mining assets and reserves of Nu-Gulf-Wingate Holdings, LLC, an affiliate of Credit Agricole Indosuez. The Wingate Creek mine assets include a beneficiation plant, mining equipment and approximately, acres of land. Wingate Creek is the only U.S. phosphate rock mine that utilizes dredge mining techniques. Two large electric cutter suction dredges the Gulf I and Gulf II are the guts of the mining operation. The Gulf I removes overburden. Measuring feet long and feet wide, the Gulf I can dig to a depth of feet at a degree ladder angle and make a 3 foot wide cut. The Gulf II, pictured above, mines the phosphate matrix. The Gulf II is 3 feet long and feet wide. It can dig to a depth of 9 feet at a degree ladder angle and make a foot wide cut. The landholdings, located in northeastern Manatee County Florida, consist of an initial 3,1-acre tract that was permitted in the mid-19s as well as a,-acre tract, commonly known as the Texaco Tract that was acquired by Wingate Land Holdings in 199. Mining commenced on the initial tract in 191 and continued intermittently until 1999 when the mine was closed due to the downturn in the phosphate market. Approximately acres containing an estimated.9 million tonnes of high quality reserves remain available for mining in the initial tract. Cargill submitted the appropriate applications and permit transfer documents to regulatory authorities last summer and is working closely with all local and state interests to develop a workable master mine plan and a detailed operating plan for the initial tract. The Manatee County Planning Commission unanimously recommended approval of the master mine plan on August 1 and the Manatee County Commission approved the plan by a vote of - on August. The master mine plan, developed cooperatively with local and state interests, includes provisions such as upgrades to certain roadways, elimination of some truck routes, construction of a 1-foot berm adjacent to a rural housing subdivision and a commitment to support policies of the Charlotte Harbor National Estuary Program. A vote on the mine operating plan is scheduled for mid- September. That is the last regulatory approval required for the re-start of mining operations. Cargill expects to begin operations in the fourth quarter. The mine will employ approximately 1 people. Launch of the Bahia de Tampa Sulphur Barge The Bahia de Tampa molten sulphur barge along with her tug the Betty S entered into service in May. The Bahia barge is the latest addition to Cargill s Texas to Tampa molten sulphur supply chain. That chain also includes a liquid sulphur terminal in Channelview, Tex., the Alafia sulphur barge and Tampa tank storage and truck load-out systems. The Channelview terminal, commissioned in January, includes unmanned - truck unloads, two, long ton storage tanks and a private and recently refurbished deep water berth. The Alafia barge, commissioned in January 1991 with capacity of approximately 19, long tons, shuttles sulphur between Gulf Coast refineries and Tampa. The Bahia barge employs the same engineering design as the Alafia. That design has proven to be the most flexible, reliable and cost effective in serving the requirements of both Gulf Coast suppliers as well as Florida customers. This addition to the fleet will provide a vital backup for a stretched and aging molten sulphur marine transportation system. The Bahia de Tampa, like her sister barge the Alafia, is a large, ocean-going, deep notched and unmanned barge that was designed and converted by the Eastern Ship Building Group in Panama City, Florida. The Bahia is slightly larger than the Alafia with capacity of approximately, long tons. Cargill Crop Nutrition Box 93/MS 19 Minneapolis, MN Phone: 9--3 Fall Disclaimer: This publication contains opinions, interpretations and predictions of Cargill Crop Nutrition of Cargill, Incorporated. Cargill, Incorporated makes no representations or warranties with respect to the accuracy, reliability or completeness of the information contained in this publication. It is not intended that any party rely, in any way, on the information contained in this publication. Cargill, Incorporated disclaims any liability with respect to any claims arising out of or relating to reliance on any information contained in this publication. This and other recent issues of Applications are available at