By Andrew Whitelaw | Source: World Bank
You would have to be living under a rock to be unaware of the decline of the commodity markets. The majority of commodities have seen red across the board over the past year, with major falls in the energy sector. This analysis examines the relationship between natural gas prices and fertilizer, and how this might impact grain producers.
The production of industrial fertilizers is an extremely energy intensive process with natural gas being a major feedstock in manufacturing. Natural gas is used as the principal ingredient in nitrogen (Urea) fertilizers and is heavily used in phosphate (DAP) fertilizers.
Due to this reliance on natural gas for the production of fertilizers we would expect a high degree of correlation between gas and fertilizer prices, which is apparent in figure 1. This chart shows a close correlation between gas and fertilizers with a correlation of 0.88 in urea and 0.84 in DAP. (1 being a perfect correlation and 0 being no correlation).
Although a strong correlation appears to exist between fertilizer and natural gas over the 1980-present period what does this mean for grain producers? This season we would expect global fertilizer prices to continue to fall in line with natural gas. However, we may find that a low Australian dollar is a double edged sword. A low A$ will insulate local grain markets from any fall in global prices but will lead to higher input costs due to the large volume of fertilizer imported.
It would be beyond our knowledge and experience to predict where natural gas prices will move in future. However, current prices are at the lowest levels since mid-2005, and the potential downside is limited. Energy analysts are not predicting a major rise in prices during 2016, and any rise will largely be dependent on crude oil levels and if that continues to languish then gas prices should also stay low.
The natural gas price has been in freefall over the past year falling to levels not seen since mid-2005, with global fertilizer prices following in line.
It is hard to predict the movement of natural gas prices over the coming seasons. However, with prices at low levels, it may be advisable to consider opportunities to forward buy for 2017/18 season either through physical purchasing or through a derivative product.
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