The long-term fundamentals for fertilizer demand remain strong. Despite a record harvest last season following favorable weather globally and increased fertilizer application as the fertilizer industry was running full blast, grain inventories remain at historically low levels. No industry can expect to be unaffected by the unprecedented economical slowdown, but food demand is less income elastic than most consumer and investment goods.
Excluding the peak prices of 2008, current international grain prices are close to historical highs, reflecting low grain inventories and increased concerns about next year’s harvest. The current grain, fertilizer and fuel prices promise record farmer margins for major crops and regions, excluding 2008. The fundamental farm economics should support a strong fertilizer demand for the current season.
However, there is a risk that the global economic slow-down creates a sentiment of uncertainty and risk aversion, holding back farmers from applying optimum amounts of fertilizer this season. Difficult access to financing may also curtail consumption, although limitations are not observed in the major, mature fertilizer markets.
Global fertilizer deliveries were lagging significantly behind the 2007/08 season. The delivery slowdown has triggered substantial production curtailments. Over the winter months, more than 10 percent of global nitrogen fertilizer capacity has been shut down, while phosphate and potash production has been halved. Supplies have been further reduced by a large drop in Chinese fertilizer exports, which are constrained for the rest of the season by an announced 110 percent export tax from February until the end of June.
The supply curtailments will give a tight market in the spring if farmers choose optimal fertilizer application rates based on the strong farm economics. If they do not, food production will be negatively affected, tightening grain markets and requiring a recovery in fertilizer demand the next year.
Yara is prepared for the potential scenario that farmers will reduce fertilizer application this season, partly based on farmers’ own decisions, but also due to production curtailments and logistical limitations as purchases continue to be delayed.
Yara is minimizing third party sourcing and has reduced NPK production. Nitrate deliveries have held up better than NPKs, and Yara continues to run nitrate production at full capacity preparing for a spring recovery and deliberately building some inventory. However, we will cut production later in the spring if we do not see a strong spring recovery, and as such are able to run inventories down to minimum levels by the end of the season. The majority of Yara’s operational cash costs are variable, reducing the financial consequences of such curtailments.
Yara’s energy costs 2009 are expected to be substantially lower than last year, based on current forward market for oil products and natural gas.
Going forward, Yara will benefit from the take-over of Saskferco effective Oct. 1, 2008, and the 50/50 joint venture in Libya (Lifeco) established Feb. 9, 2009.