31 July 1998

No big rush despite the low prices

Despite the lowest fertiliser prices for a decade, farmers are

not rushing to buy. Few believe prices are likely to rise

enough between now and January to make it worthwhile.

Mike Stickland, independent fertiliser broker and

consultant, believes they are right

EVERY year, for a variety of reasons, a good number of farmers buy their fertiliser for the coming year before harvest.

Some years this number is inflated by those who believe the price of fertiliser will rise significantly, but few farmers thought that way this year.

Apart from the fertiliser manufacturers themselves, nobody has been saying that buying early will pay off this season. Although UK makers have been busy and have enough deliveries on the books to keep them going, that does not necessarily mean that more farmers have been buying. Rather, it reflects a lack of competition from the importers to date.

The minimum import price for Russian ammonium nitrate, introduced by the EU as an anti-dumping measure, means Russian producers are unable, at the moment, to sell at a competitive price.

Working backwards from a delivered farm price this June and July which averaged about £87/t, we can assume that imported fertiliser would not attract farmer buyers at anything over £80/t.

Taking into account discharge delivery and profit, an import price of £65/t duty paid would be needed. That equates to a duty unpaid price for Russian AN of £42/t. A freight charge of £11/t and about 65p for insurance brings that back to an export price without profit of £30/t from the Baltic, which so far has been impossible.

But countries like Poland, the Ukraine and Lithuania do not have to pay import duty. So the £65/t import price, while unattractive, is not totally impossible for a seller. If the price rose by only £5/t there would be plenty on offer, which could tempt some farmers into the market.

Traditionally there is a second tranche of fertiliser buying from arable farmers in the second half of September and through October. But for this to happen, most growers will want to be sure of a better deal than is likely in January.

This has not always been the case (see graph). Although manufacturers would like to raise their prices, factors that are appearing again this season are keeping the price down.

Oversupply on the domestic market has been a common problem for some years. When Kemira was attempting to buy ICI Fertilisers, the industry felt that by reducing the market to two players and by shutting down additional capacity, a stable market could result. In fact, the opposite has happened.

A big aggressive American company – Terra – now owns the UKs biggest ammonium nitrate producer. Far from cutting back production in the cause of market stability, it wants to "debottleneck" plants and enhance their operating capacity.

Naturally, when there are too many tonnes of ammonium nitrate chasing too few buyers, the tendency is for the price to go down. Merchants, particularly the major players, are anxiously competing with each other and use their buying power to play manufacturer against manufacturer, not only for the very big orders.

They frequently build a "fertiliser book", which they offer to the maker giving them the biggest discount. When the market is buoyant, the producers can be tough, but the UK market is far from buoyant.

Not only does Terra want to sell more tonnes, but the market has diminished over the past two years and will diminish further with the increased rate of set-aside. When farmers hold back from buying in these circumstances, the reduced number of buyers attract more attention and prices can be forced lower.

The buffer to such a price slide in these cases is the cost of production and there comes a time when a producer says stop. How low is that price today?

While Terra, the cheapest producer, can operate at or below todays price level, it is unlikely that either Hydro or Kemira are comfortable. Norsk Hydro imports the ammonia for ammonium nitrate production and it is paying about $140/t cif (£85/t) and to make a tonne of ammonium nitrate it needs just under 0.5t of ammonia.

An average £87/t delivered to the farm nets back to an ex-works price of £75/t or less. With £41/t going on ammonia alone, other raw materials, bags, labour, fuel and a mass of overheads do not leave much margin.

World nitrogen prices are low and likely to get lower and only a cataclysmic event could reverse the trend. Furthermore, as more production comes on stream the market for the moment does not rise to accommodate it.

If after harvest the major producers can raise their price to about £90/t delivered, they will be very lucky. I do not see them achieving it.

Phosphates and potash are a different story. Although there is a global surplus of phosphate, world producers manage it better. The main producers are either national companies, as in Morocco and Tunisia, or the phosphate producers of Florida.

They have learned over recent years to reduce production levels in time of shortage, and so maintain the price. It is not likely that the cost of phosphates to the UK blenders will decline.

World production of granular potash is in balance with demand. The Russian and Belarus producers are restrained by anti-dumping levies, so the price of potash is stable and more likely to rise than fall before the spring.

It is unlikely that nitrogen prices to blenders will fall far below their current low level. While there is keen competition between blenders, there is little margin in the business to be eroded. The compound manufacturers have no need ever to let their price fall as low as the blended price.

As it is unlikely that the price of nitrogen will rise above the £90/t mark until next spring, the limit on imports that this will impose will force those farmers who favour imported material to wait until then. The resulting solid market will see prices rise in February or March. Meanwhile, I see little chance of any big drop in price. NPK compounds and blends are as cheap now as they are likely to get. The only possibility of price movement is upwards.

Farmers generally expect the price of NPKs to follow the nitrogen price. If an unexpected raw material price rise takes place the price of blends could rise £10/t before farmers really reacted. &#42