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Tuesday, October 11, 2016

Input Pricing: Fertilizer

By Andrew Whitelaw  |  Source: CME, World Bank, FAO, Trade

Key points

  • There is a global glut of fertilizer, with supply exceeding demand.
  • Urea prices rose during September; however, the outlook remains bearish.
  • It is possible to use swaps to hedge fertilizer pricing, however there is still an element of basis risk.

2016-10-11 FERT FIG 1

2016-10-11 FERT FIG 2

2016-10-11 FERT FIG 3

In addition to monitoring the output markets (grain, livestock & wool), it is important to keep a close eye on the input markets (fuel, fertilizer & chemicals). This is especially crucial considering the low priced grain environment. In this analysis we provide an update on fertilizer market & look into swap prices.

The fertilizer market has been in on a downward trend since this this time last year. The fertilizer market like all markets is driven by supply and demand. In recent years the increase in supply of fertilizer has outstripped demand, causing a global glut of Urea, DAP and Phosphate.  

Figure 1 presents the Urea price in the Black Sea converted into A$. The world bank uses the Black Sea price as this is solid representation of global urea pricing. During September the Urea price rose US$9 or A$12.80. The rise in price is minimal and the overall expectation is for flat to lower pricing in the coming months. In Figure 2 we display the DAP price in the US Gulf also converted into A$. The DAP market was largely unchanged in September, and maintaining the lowest levels in A$ since January 2016.

It is important to note that these prices are not Australian prices, and locally additional costs will be added in order to get a price either upcountry or at port in Australia. Due to the continuing imbalance between supply and demand we are still bearish on fertilizer prices for the coming 6-12 months.

There are numerous ways to lock in forward prices for fertilizer including the following:

  • Purchase and store fertilizer on farm
  • Lock in a forward physical price
  • Using fertilizer swaps

Grain swaps have been used by Australian farmers for many years, and most will at least be aware of their use however for a refresher visit our guide on grain swaps here

In figure 3, we can see the NOLA (New Orleans) swap market converted into A$ since the beginning of the decade. It is clear that from the chart Urea is at the low end of the scale for this time period. In grain we have basis to add or subtract to determine the overall price, this is also the case for fertilizer with the cost of transport, retailing and margins being added to get a local price. Currently there is not a pricing mechanism to accurately determine what these basis levels are, however we are hopeful in future this will be available. 

What does this mean?

The fertilizer market is currently at low levels especially for Urea, however the market outlook is bearish to neutral reducing the impetus to go out straight away and stock up.

We recommend keeping a close eye on both the international market and local pricing levels to determine a fair value in the coming months.  

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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