Food prices to drive fertiliser demand

The global fertiliser industry is passing through tough times, as economic uncertainty has impacted prices and off-take, prompting major players to go in for production cuts in recent times. However, companies are bullish on long-term prospects, as rising demand for food, driven by a growing population and income levels, would result in increased off-take.

Business Linecaught up with Mr James T. Prokopanko, President and CEO of The Mosaic Company, a top-three global fertiliser-maker, who feels that high food prices globally would mean greater demand for fertilisers.Excerpts:

What is your current assessment of the fertiliser market?

We are going through a period of soft fertiliser demand. The next big season will be in North America, where the spring planting will start in February, and that'll roll into the summer crop in India. Two things happened in December, which impacted demand.

Grain prices were weak, as corn and soya prices had begun to drop, and there were a lot of concerns with respect to developments in Europe and Greece. There was a wall of worry built around dealers in North America. So, dealers weren't prepared to buy, which impacted demand.

Then there was drought in South America — in Argentina and Southern Brazil in the middle of December. Grain prices have turned around, and we are seeing interest from dealers to buy products. We see it has bottomed. There have been some production cuts.

But just because demand has been weak, farmers are going to buy a lot. Prices of grain have never been so high, relative to the prices of fertiliser.

So, it is going to be very economical (to buy fertiliser) in North America, and that's developing in Brazil, where soya bean prices have been rising, and that will lead to a rise in fertiliser demand.

What about India?

It will follow along. In the next few weeks, demand will pick up in North America. We have hit a bottom on fertiliser prices. At this point, Asia, China and India have been paying less for potash than farmers in North America. The prices in North America came down, and we think they'll start moving up.

I think we have stable prices in India and in China, like last year, at least going forward to the next year. It is all driven by the prosperity of the farmers and how well North American and South American farmers do; demand will be very high. Indian prices were impacted by currency volatility.

To what extent do you think producers will be able to control the prices by curtailing the output?

We cut phosphate production because there was no demand, as people had put off buying. Dealers, in order to avoid demand risks, weren't willing to stock up. The reason we cut output was because people weren't buying, and we don't see it as a way to raise prices. And prices softened because people stopped buying. We are investing approximately $5 billion in new expansion in eight years.

But do you see a rebound in production?

No. China hasn't settled, and we expect that to happen in the first quarter. In India, there are inventories at the ports. The demand isn't coming from India and China, the two large markets.

Except for Malaysia and Indonesia, the large Asian markets aren't buying much. In the case of China, it has been a matter of higher prices, and farmers have reduced application until they see stronger food prices. Also, they had high inventories, which are coming down.

In India, in the case of phosphates, in the first half, it was an availability issue, as arrivals were lower. In the second half, prices went up as a result of a weak currency, which impacted the off-take. In the next kharif season, the availability should be good, and consumption should rebound.

Farmers are going to apply fertilisers, and the high grain prices should drive the fertiliser off-take. Population growth and GDP in these two nations will keep the demand growing for grain.

The protein-driven demand of the population and higher incomes means more food and better times for the farmers. More people, more income, eating more, and limited food supplies will keep the demand growing for fertilisers.

Do you think the commodity boom is over now?

I don't think so. Maybe we are in a trough. In future, from where we are today, the highs will be higher and lows will be higher than what they have been historically been. We are producing just as much grain as were consuming. We are operating on a thin edge and any drought in Brazil or the US or any part of the globe will create an imbalance.

Due to the climate volatilities, you just can't count on having great crops. During the last four years, there has been an all-time record production of food grains, but the carryover stocks, except for wheat, are low. I don't think we are returning to low grain prices as long as the global economies do well.

How do you see food inflation impacting fertiliser demand?

Higher food prices will mean greater demand for fertilisers. High food price, driven by high commodity prices, is an incentive for farmers to produce more. Sometimes, food inflation isn't only because of grain costs. It could be due to processed foods, packing, transportation and advertising. And not much goes to the farmers.

Food inflation means countries are going to be far more serious in supporting farmers to produce more efficiently. If you are not to produce, you are going to import, and you are going to have high transportation costs among others. Food inflation means more productive farmers.

Among the global commodities — metals and agricultural produce were down, and only the energy prices were holding up. What is your view?

It's all cyclical. It has become more accentuated. Oil has held up and it continues to, because of demand. People are driving cars and factories are running. Natural gas has changed as a result of splitting of share gas.

The underlying foundation of the economy is energy-based, and continues to grow. With the high prices in 2008, we have become much more efficient and have automated. I think in the longer term, the highs will be higher, and the lows will be higher than usual.

Fertiliser prices have moderated a little in recent weeks. Do you think they will go down further from the current levels?

Prices have stabilised now. Grain prices have everything to do with the fertiliser prices. If grain prices take off in North America, I think we're going to see rapidly increasing demand for fertilisers and they can go up.

I think fertiliser prices are at a good position now, relative to grain prices. If grain prices go down, if there is a huge crop in the US, fertilisers could come down.

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