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Thursday, June 16, 2016

Fertilizer update: Car Bombs and the A$

By Andrew Whitelaw  |  Source: Trade, World Bank

Key points

  • Urea is currently sitting at the 8th percentile for the period 2010-present.
  • Dap is currently sitting at the 14th percentile for the period 2010-present.
  • A$ is predicted to fall to mid-60’s this will impact on the competitiveness of imported fertilizers.

2016-06-16 CAR BOMBS FIG 1

At Mecardo, we regularly update on the ‘output’ markets of livestock, wool and grain. It is however important to examine the other side of the coin and look into the input markets, in this report we will examine the fertilizer market and whether it is a good buy at the moment.

The fertilizer market like all other commodity markets is largely driven by supply and demand. There is currently a global oversupply of fertilizer, which is continuing to place pressure on prices. In the first quarter of 2016 there has been a 1/3 drop in nitrogen based fertilizer exports out of China against the same period last year. This reduction will place pressure on supply however with large global inventories it’s unlikely to drive prices dramatically upwards immediately.

However, on the demand side of the market the Turkish ministry of agriculture alongside the Ministry of the Interior enacted what is considered a severe and excessive ban on all nitrate based fertilizers. The ban has been put in place after a number of car bombs have rocked the country since the beginning of the year, and that bombs utilized nitrate based fertilizers. This ban could be considered appropriate due to the security aspects, and the potential loss of lives, however many of the banned fertilizers pose no explosive threat.

It is not yet known how long this ban will be in place, however Turkey has a market of around 2mmt with around one quarter of requirements imported.

In terms of fertilizer pricing, on a global level in A$ terms both DAP and Urea are sitting below average since the start of the decade (figure 1). There was a slight increase in prices month-on-month however this is attributed mainly to the drop in the A$ during may. When we look at percentiles for fertilizer (table 1), we have selected three periods (2000, 2005 & 2010) and based on the period from present to 2010 DAP and Urea are attractive buys. In the case of Urea even based on present to 2005, prices have only been higher 15% of the time.

The Australian dollar is currently sitting at 74c, after having started the month at 72c. There are a number of forecasts for the A$ ranging from the realistic mid-60’s to some suggesting sub-40’s. As the bulk of fertilizers in Australia are imported, depreciation of the A$ will increase purchasing costs. 

What does this mean?

Urea and Dap are currently sitting at quite attractive levels (on a global basis) and it is worthwhile discussing with your supplier’s opportunities to your requirements as far forward as possible.

There are some opportunities to use derivatives, but unfortunately liquidity is likely to be an issue on these markets.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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