The impact of fertilizers
Fertilizers play an important role in the development of crops by providing required nutrients. They may also improve the quality of crops. Fertilizers also help improve yield, which is one of the most crucial requirements for bridging the gap between an ever-increasing human population and limited arable land. We looked at this in detail in the previous parts of this series.
Liebig’s Law of the Minimum
Liebig’s Law of the Minimum states that plant development is limited by the most deficient nutrient in the soil, even if other nutrients are abundantly available. So it’s important to have balanced nutrients.
As you can see in the above graph, cereal[1. cereal includes corn, wheat, rice, oats, barley, rye, sorghum, millet, buckwheat, and mixed grains] yield[2. 1 kilogram of cereal per hectare] has increased from 3,074.0 kg (kilograms) per hectare[3. a hectare is about 2.5 acres] in 2002 to 3,897.0 kg per hectare in 2013.
Over this period, fertilizer consumption increased from roughly 98.0 kg per hectare in 2002 to 120.0 kg per hectare in 2013. The growth in fertilizer consumption (MOO), when compared to cereal yield growth, showed a high correlation based on data compiled by the World Bank’s World Development Indicators.
Next, let’s see how fertilizer consumption has evolved over the past century. We’ll also look at fertilizer consumption by region.
Managing the cost of production is key for a commodities business (MOO). Cost of production can impact the realized prices of fertilizers and, in turn, impact the profitabilities and valuations of fertilizer companies. These companies include PotashCorp (POT), Mosaic (MOS), Intrepid Potash (IPI), and CF Industries (CF). Let’s dig down more deeply.
Steep versus flat cost curve
In the above chart, we’ve compared a flatter cost curve with a steeper cost curve. As in other commodity businesses, market prices for the agricultural chemicals business are set by supply and demand.
When the demand (x-axis) increases (moves to the right), the cost per product ton increases. The increase occurs because the producer with a higher cost of production comes online to meet the additional market demand. The producer that comes online, known as the marginal producer, sets the market price, which is represented by the price ceiling.
However, when the cost of production declines, the cost curve flattens, and the marginal producer can produce at a lower cost. Market prices for the commodity fall and squeeze the margins.
Profitability in 2016
The profitabilities of most fertilizer companies in 2016 were marred by a flatter cost curve. It became non-sustainable for some players to continue producing at higher operating rates. Prices had fallen significantly as a result of oversupply caused by marginal producers. As a result, some companies rolled back their production by idling their manufacturing plants.
In the next part, we’ll look at the profitabilities of some fertilizer companies.
Farmers all over the world are key fertilizer customers. Since fertilizer is a cost that can impact farmers’ margins, it’s important to monitor farm economics and how they evolve over time.
The above graph shows various operating costs for corn for a US farmer in 2015. According to the USDA (United States Department of Agriculture), fertilizer was the major cost of operations, accounting for as much as 41.0% of operating costs. It was followed by seeds, which accounted for 31.0%.
Following the bumper crop season in 2011, prices for corn took a hit, and farm income suffered. From 2012–2014, farm income for US corn farmers continued to fall year-over-year. In 2015, it rose only 2.0% year-over-year.
Impact on fertilizer
With falling farm income, costs need to be rationed carefully. Fertilizers can be a major cost of production. So farmers looking to reduce their fertilizer costs can significantly impact sales for agricultural fertilizer companies such as PotashCorp (POT), CF Industries (CF), Agrium (AGU), and Mosaic (MOS).
The fertilizer business is cyclical. During a boom time, fertilizer companies can earn high margins, which they can reinvest into capacity expansion. However, overcapacity leads to increased supply and eventually lower fertilizer prices. That triggers companies to idle some of their capacities or scrap expansion plans altogether until demand stabilizes fertilizer prices. In 2016, the agricultural fertilizer industry (SOIL) was in its bottom cycle, and we saw many companies idling their operations.
In the next part, we’ll take a look at the biggest players in the fertilizer industry.
As we saw in the previous part of this series, fertilizer is the single most important catalyst in improving crop yield. So fertilizer usage has increased around the globe in the past century.
The above graph shows how global fertilizer[1. NPK (nitrogen, phosphorus, potassium) fertilizers] consumption has increased over the years. According to the IFA (International Fertilizer Industry Association), fertilizer consumption in the 2010–2011 season was 173.0 million tons. It was close to zero about 90 years ago.
The above graph shows a fall in fertilizer consumption in the early 1990s. That was due to the collapse of the former Soviet Union, according to the IFA.
About 70.0% of the 173.0 million tons of fertilizer was consumed by developing countries. The remaining was consumed by developed countries. Let’s look at fertilizer[2. NPK fertilizers] consumption by region in the 2010–2011 season.
Consumption by region
The majority of fertilizer consumption in the 2010–2011 season took place in China, with a 29.0% consumption rate, or 50.7 million tons. About 20.0% of consumption came from South Asia, with India as the largest consuming region. Excluding China, consumption in East Asia accounted for 8.0%.
North America consumed about 13.0% of total global fertilizer consumption during the same period. It was followed by Latin America and the Caribbean, which accounted for 10.0%. Brazil and Argentina are key agricultural markets in Latin America.
West and Central Europe along with Eastern Europe and Central Asia contributed 13.0% of the total global consumption.
In the next part, we’ll take a look at various types of fertilizers.
Macronutrient global consumption
There’s been a lot of focus on a few subtypes of NPK (nitrogen, phosphorous, and potassium) fertilizers. Naturally, fertilizer subtypes that are consumed the most globally get the most attention. Let’s look at which NPK subtypes are consumed the most.
Nitrogen fertilizer consumption
Urea is the most consumed nitrogen fertilizer globally at about 56.0% of all nitrogen fertilizers, according to the IFA (International Fertilizer Industry Association). India, China, and Brazil consume mostly urea for their nitrogen fertilizer use, according to the IFA.
AN/CAN (ammonium nitrate/calcium ammonium nitrate) is the second-most globally consumed nitrogen fertilizer at about 9.0% of all nitrogen fertilizers. West and Central Europe mostly consume nitrate for their total mix of nitrogen fertilizer consumption.
Phosphorous fertilizer consumption
Among the total phosphorous fertilizer consumption, DAP/MAP (diammonium phosphate/monoammonium phosphate) are consumed the most globally at about 57.0% of the total phosphorous fertilizers. They’re followed by SSP (single superphosphate) and TSP (triple superphosphate).
Potash fertilizer consumption
MOP/SOP (muriate of potash/sulphate of potash) are the most consumed potassium fertilizers in the world at about 71.0% of potash consumption.
Now let’s take a look at some of the players in the fertilizer industry.
Investing in the agricultural fertilizer industry can be rewarding. But lately, this industry has come under severe pressure. It’s important to understand what drives sales for agricultural fertilizer companies (MOO), including PotashCorp (POT), Mosaic (MOS), Agrium (AGU), and CF Industries (CF).
Price and volume drivers
Most standard fertilizers are essentially commodities. So companies that manufacture standard fertilizers such as urea, DAP (diammonium phosphate), and MOP (muriate of potash) don’t have control over fertilizer prices.
Fertilizer prices are affected by supply dynamics such as total available production capacity, capacity operating rates, raw material costs and their availability, and government regulations.
It’s important to note that fertilizer companies don’t operate at 100% capacity. A company that operates above its historical average operating rates may indicate a need for expansion in the future. A company operating below its historical operating rates may indicate an increase in market total supply or a reduction in demand.
Demand dynamics include the following:
- GDP growth
- planted acres
- crop prices
- crop inventory
- dietary patterns
- growth in population
- application rates
- alternative use of crops such as ethanol made from corn
- currency fluctuations
These supply demand dynamics are in turn affected by a host of drivers. Let’s take a look at them in the next part.