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Thursday, April 21, 2016

Input Update: Strong A$ helping

By Andrew Whitelaw  |  Source: World Bank, AAA, Trade

Key points

  • Urea prices in A$ terms fell 10%
  • Dap prices in A$ terms fell 6%
  • Australian pump prices are currently at the 35th percentile for period 2000-present.

2016-04-21 Input Update Fig 1

2016-04-21 Input Update Fig 2

In February in two separate articles, we examined the pricing of two of the main inputs in crop production; fuel and fertilizer. There have been a few changes since we ran these articles, crude oil prices and the Australian dollar have both strongly appreciated. In this analysis we will look at the current market.

In February in two separate articles, we examined the pricing of two of the main inputs in crop production; fuel and fertilizer. There have been a few changes since we ran these articles, crude oil prices and the Australian dollar have both strongly appreciated. In this analysis we will look at the current market.

Fuel
The fuel price in March was effectively unchanged and averaged only 0.5c more than February. This is good news considering the average price of a barrel of oil increased by 14% or US$5 per barrel (figure1). The higher Australian dollar during march (7% higher) helped keep prices stable, finally a good result from the higher A$!

The recent meeting of OPEC in Doha ended with no agreements to freeze or cut supply. A major supply reduction would have pushed prices higher, however the lack of any change will likely lead to the oil price treading water for a while unless demand increases or other unforeseen changes.

Fertilizer
The main fertilizers which we pay attention to are DAP and Urea, as these make up the majority of fertilizers used by Australian grain growers. In the March, DAP increased by 1%, and Urea fell by 3%. However due to the strong A$ this lead to a 6% fall in DAP and 10% fall in Urea (figure 2).

Globally there are large stocks of Urea available, due to reduced demand globally which is placing pressure on prices. There are also concerns that the removal of trade sanctions in Iran will lead to extra supply entering the market, as a large natural gas producer they are able to produce Urea extremely efficiently, and up until this year found their markets limited.

What does this mean?

The market for fertilizer and fuel is currently at low levels, and it is important to take full advantage. These inputs are based on natural gas and crude oil, and these can be highly volatile and therefore discussion with your suppliers about opportunities for forward contracts is advisable.

There are also opportunities for the use of diesel and fertilizer swaps, which will enable you to lock in a large component of your input prices.

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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