By Andrew Whitelaw | Source: World Bank, FAO, Trade, AAA, Platts
The grain market is currently in the doldrums, with little in the way of positivity for the next few months. At least our major inputs are starting to get cheaper, and assist with our cost of production. In this update we will give an insight into the fuel and fertilizer market.
The fertilizer market continues to reel under pressure from over capacity with major falls in global prices during July, and additionally assisted by a stronger Australian dollar. The pricing of DAP when converted to A$, fell by $19 (-4%) and Urea by $25 (-10%), and well below the average since 2010 (figure 1). This fall in price places DAP at its lowest level since December 2013 and Urea at levels not seen since February 2005. The prices reflect global prices, and are likely to be substantially lower than prices quoted in Australia, but gives an indication of where prices should be heading.
The fertilizer industry supply and demand balance between now and 2018 is expected to remain in the favour of growers. During this period, it is expected that nitrogen based fertilizer supply will increase by 3.7% annually whilst demand will only increase by 1.4%. This situation is mirrored with potash (4.2% vs 2.6%) and Phosphate (2.7% vs 2.3%). The excess supply reduces the capacity for large prices increases unless we see a substantial shutdown of plants or an unexpected increase in fertilizer demand.
At these levels it is worthwhile examining opportunities to lock in prices for the future either through derivative based products such as swaps or through forward physical contracts. If using derivatives there is still an element of basis risk, due to the difficulty of ascertaining longer term Australian physical fertilizer prices.
In another benefit for all the diesel burners out there on the run up to harvest, is that petrol prices have dropped slightly, with the average petrol price 21c lower than the same time last year (Figure 2). The petrol prices and diesel are closely aligned, therefore petrol price movements can be used as a proxy for diesel price movements, and vice versa.
In an interesting move the ACCC this week announced that although petrol prices are a relatively low levels that they were still too high due to retail margins being at record highs. In figure 3, we can see the basis between Singapore petrol (FOB) and Australian retail petrol prices, and it is quite clear that basis has substantially increased since 1998. The Singapore petrol price is used to determine our local prices for fuel as the majority of our fuel is imported from Singapore. This increase in basis can potentially be attributed to freight costs, increased fuel tax and other operation costs however it is clear which direction basis is travelling.
The low priced grain environment which we currently inhabit highlights the importance of reducing costs of production, especially when we are competing with origins in the Black Sea.
When we get good prices for our outputs it is important to push the horizon as far as possible, and likewise we should be examining the possibilities when it comes to our inputs.
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