Whole world grain and oilseed manufacturing is predicted to rise this yr, one cause why costs for gas and fertilizer will doubtless stay stubbornly excessive for the foreseeable future.
International output for grains and oilseeds is predicted to rise by practically 106 million metric tonnes (3.2%) from final yr to three.423 billion metric tonnes of output in 2021/22. China, Ukraine, South America, and the U.S. are main the continued world acreage growth, which is predicted to prime 2.03 billion acres in 2021/22 for wheat, coarse grain, and main oilseed manufacturing. International acreage for the crop combine has risen 3.2% since 2019/20, in response to USDA-Foreign Agriculture Service data, rising world demand for fertilizers and gas.
USDA’s Financial Analysis service will replace its 2021 manufacturing forecasts firstly of summer time, that are doubtless to supply extra insights to nationwide developments in fertilizer, chemical, and enter prices. Finalized 2020 knowledge launched in Might noticed common working prices (inputs, gas, repairs, irrigation, working curiosity) throughout the U.S. fall 1% from 2019.
However in right now’s period of hovering commodity costs, world acreage expansions, and rising inflation, it isn’t doubtless that working prices will lower in 2021. Nutrien expects U.S. and Canadian growers to extend crop enter expenditures between 4% – 7% this yr on acreage expansions. A rebound within the Brazilian actual is more likely to improve Brazilian farmers’ crop expenditures by 12%-14% this yr.
Here’s a fast have a look at fertilizer, gas, and enter pricing dynamics as spring planting season begins to wind down.
At first look natural gas price fluctuations don’t appear inherently related to grain manufacturing. However pure gasoline accounts for 40% of U.S. electricity generation and is a key gas supply for agricultural processing vegetation. It’s a obligatory ingredient for fertilizer manufacturing.
As a result of pure gasoline costs could be a main indicator of rising enter costs – and farmers will likely be further reliant on yields this yr to beat rising prices – it’s price a deep dive into pure gasoline pricing to see if farmers can strategize a hedge in opposition to shrinking revenue margins.
Pure gasoline consumption for electrical energy within the U.S. is predicted to drop this summer time in response to increased costs. The U.S. Vitality Info Administration (EIA) expects pure gasoline costs to be 46% higher this summer in comparison with final.
The nation’s electrical grid will depend on cheaper coal-generated electrical energy and rising renewable photo voltaic and wind power capability to outlive the summer time – or till pure gasoline costs grow to be extra inexpensive. If pure gasoline costs fall in July or August, farmers may begin to see decrease manufacturing prices for fertilizers.
Nitrogen provides had been available in 2020, with many provides ordered for the 2019 crop yr left over to fulfill demand. However with world acreage estimates on the rise in 2021, final yr’s provide glut of nitrogen isn’t any extra.
In its quarterly earnings name in Might, ag retailer Nutrien cited increased pure gasoline costs as contributing to increased manufacturing prices in the course of the first quarter of 2021. International nitrogen manufacturing has struggled to maintain up with quickly increasing acres, particularly following the lags from final yr’s provide glut and subsequent pandemic-related manufacturing delays.
Retailers had been pressured to cross on the elevated prices to farmers within the type of increased anhydrous prices. Nutrien’s internet realized promoting worth rose 13% in Q1 of 2021 from the earlier yr in consequence.
In Illinois, anhydrous ammonia costs are 40% increased than a yr in the past, ranging between $650-$740/ton with a mean worth of $704/ton. Costs leveled off simply over the $700/ton benchmark as planting exercise slowed and demand calmed. Falling pure gasoline consumption and prices over the summer time may create pricing alternatives as crops are pollinating in late July and early August.
Urea costs noticed broad fluctuations over the previous couple months as markets awaited Indian buying prospects to play out within the worldwide market.
India, one of many world’s largest urea importers, authorized a subsidy to make use of urea from gasified coal manufacturing for cleaner electrical energy technology and extra crop nutrient output. The brand new coverage will result in the development of a coal gasification plant that churns out 1.27 million tonnes of urea per yr.
India has additionally struggled with rising COVID-19 circumstances this spring. Whereas fertilizer and power amenities are anticipated to stay open throughout any lockdown, building on the coal-urea plant has confronted pandemic-related delays. India’s drive to create extra urea capability this yr will largely rely on its capability to beat the COVID-19 pandemic.
China’s 2021 urea exports may match these of 2020 by yr finish, reaching 5.5 million tonnes. It’s a extra optimistic outlook for Chinese language urea output following manufacturing disruptions over the winter on account of pure gasoline shortages. China is the world’s largest urea producer.
Acreage will increase in North and South America will doubtless contribute to increased urea costs this summer time. However the overwhelming sentiment for world urea costs stays tied to India’s degree of utilization in 2021 and rising world manufacturing capability.
Wholesale UAN costs on the U.S. Gulf steadied between $320-$327/ton in the course of the second quarter of 2021, after rising 2.5 occasions its worth between December 2020 and April 2021. Accomplished planting exercise and a restoration from February’s winter storms helped decelerate UAN’s rise – for now.
Count on the UAN complicated to intently observe urea’s within the coming months. If extra urea manufacturing is introduced on-line over the summer time, UAN costs may observe barely decrease main into fall harvest season.
As farmers look to fall fertilizer purposes, it’s prudent to think about different nitrogen fertilizer choices over increased priced anhydrous ammonia and urea. Relying on how market dynamics shake out, UAN may present farmers an inexpensive different for nitrogen purposes.
In its early Might 2021 earnings name to deal with first quarter 2021 outcomes, ag retailer Mosaic cited elevated worldwide acreage as driving increased world phosphate demand and subsequently costs. As uncooked materials costs elevated this spring, Mosaic expects wholesale phosphate costs to rise $30 to $35 per metric tonne as spring planting season attracts to an in depth.
U.S. MAP and DAP provides are more likely to stay tight, in response to steerage from Nutrien, particularly as countervailing tariffs maintain provides from prime producers Russia and Morocco from replenishing U.S. stockpiles. International provide chains are usually not at the moment working at environment friendly sufficient capacities to adequately provide U.S. growers with phosphate shares.
Mosaic expects costs for sulfur (sulfuric acid), the primary ingredient for phosphate manufacturing, to double by the tip of June from the primary quarter of 2021. Phosphate manufacturing slowdowns earlier this yr within the U.S. Gulf on account of pandemic-related points have tightened sulfur provides, and the shortages are more likely to proceed by early summer time. The added prices will likely be handed right down to farm-level pricing.
Retail costs for MAP and DAP steadied in Illinois as planting season wound down. However tight provides and rising manufacturing prices will proceed to loom giant over the phosphate complicated because the summer time months drag on.
The rise in acreage in North America this spring was a key issue driving potash costs increased, Nutrien defined in a first quarter 2021 earnings call in Might. Nutrien reported close to file ranges of potash gross sales within the first quarter of 2021 on rising world potassium demand.
Potash was one of many extra inexpensive inputs for farmers this spring. Potash costs in Illinois solely rose 22% over the previous yr, the bottom of the bundle of inputs tracked by the USDA’s Illinois Division of Ag Market Information Service. However robust world demand, notably from China and India, looms within the shadows of potash demand and will overpower costs if rising manufacturing capability or logistics points can’t match utilization charges.
Mosaic pointed to unfavorable overseas trade charges and excessive pure gasoline costs as chief drivers of rising potash costs earlier this spring. However may excessive costs treatment excessive costs? Maybe for Mosaic.
The corporate introduced the reopening of a mine is Saskatchewan over the course of the subsequent yr or two, which might improve world potassium manufacturing capability. It should doubtless do little to assist pricing for Harvest 2021 however may present some reduction to farmers by the point choices are being made for the 2022 crop.
Because the world’s economies reopen – quickly within the U.S. however slower elsewhere – the overarching outlook for power costs is increased demand and costs as manufacturing recalibrates to utilization charges within the post-pandemic period. In fact, heightened volatility is predicted to loom giant over the power sector within the close to future, which makes the outlook much less clear.
Rising COVID-19 vaccination charges within the U.S. boosted oil demand as shoppers elevated financial exercise. However don’t anticipate oil demand to get well uniformly across the globe. India’s latest surge in COVID-19 circumstances led to declining oil utilization charges as lockdown measures had been re-enacted, doubtlessly offsetting increased utilization charges within the U.S. in regard to grease pricing.
The U.S. Energy Information Administration (EIA) expects summer time 2021 gasoline consumption ranges, projected at practically 9.0 million barrels/day throughout April to September within the U.S., to prime summer time 2020 charges. And whereas that’s excellent news, it nonetheless doesn’t imply demand is absolutely recovered. The EIA doesn’t anticipate 2021 summer time gasoline demand to match 2019 ranges, falling brief to the tune of 0.6 million barrels/day.
Even so, anticipate oil provides to stay plentiful within the coming months. Present West Texas Intermediate (WTI) crude costs have traded in a spread of $61.65-$66.27/barrel over the previous few weeks. U.S. oil drillers sometimes search growth alternatives when WTI crude costs prime $55/barrel.
Enlargement initiatives within the Gulf of Mexico are more likely to cushion present stock ranges, which ought to assist maintain gas costs from fluctuating too quickly, barring any sudden refinery shut downs or any additional cyberattacks on energy infrastructure.
Diesel costs in Illinois have risen a staggering 79% from final yr’s lows as elevated power demand trickles right down to farmer-level markets. National average diesel prices sat at $3.249/gallon in response to EIA knowledge launched earlier this week, marking a 3rd straight week of rising costs. The most recent on freeway diesel gas worth is over 1 / 4 increased than EIA’s anticipated common for diesel costs in 2021.
Farmers might want to compete for diesel with freight firms frantically trying to restore order to supply chains within the post-pandemic world. With volatility as the one certainty on the planet proper now, diesel costs will doubtless stay on the mercy of delivery capability within the post-pandemic world.
Elevated gas manufacturing will present the largest alternative for higher diesel pricing over the summer time. However anticipate these alternatives to be few and much between. Capitalize on them once they come alongside.
“But is it inflation?”
Inflation, by definition, is the measure of rising costs of products and providers in an financial system. It’s attributable to rising manufacturing prices or speedy demand will increase. Economists and analysts proceed to argue about its affect and the way lengthy the present uptick in inflation will final, although the Federal Reserve maintains its stance that the latest surge is more likely to be short-term.
By way of fertilizer costs, the newest worth will increase are justified by each driving forces of inflation. Larger uncooked materials costs and shortages, elevated transportation prices, labor shortages, and import delays all improve manufacturing prices for fertilizers. Mixed with rising world fertilizer demand and subsequent rises in commodity costs, there’s robust basic assist for increased enter costs.
The extra related response to this query shouldn’t be whether or not or not it’s inflation, however fairly how lengthy the upper costs will final. Tight crop provides by the subsequent advertising and marketing yr are more likely to justify increased revenues, which make decrease enter prices much less doubtless over the subsequent yr.
However the outlook for the journey to the post-pandemic world stays considerably foggy. Keep watch over continued Federal Reserve steerage about inflationary pressures in addition to provide chain dynamics, to gauge the probability of decrease gas and fertilizer costs. And buckle in – if the final yr is any indicator of the subsequent yr to come back, the wild trip is more likely to proceed into the post-pandemic period.
Provide chain snafus and outlook
Because the world enters a post-pandemic period, it would take some time for enterprise operations to return again to “normal.” Rising farm enter costs are more likely to stay excessive by the summer time as provide chains are recalibrated and client demand evens out.
Freight costs and delivery delays are more likely to stay excessive throughout this era. Rabobank expects wholesale costs for chemical substances atrazine, glufosinate, and glyphosate to stay 40%-50% increased this yr relative to final on account of excessive delivery prices from main producer China, the place manufacturing backlogs stemming from final yr’s pandemic closures proceed to delay orders.
By way of the second quarter of 2021, we anticipate farm enter costs to stay excessive. Manufacturing prices and world demand for agricultural fertilizers, chemical substances, inputs, and gas are going by a interval of progress in response to produce shortages, acreage expansions, and excessive commodity costs.
As firms readjust manufacturing capability to satisfy demand, farmers are more likely to bear the burden of those increased manufacturing prices handed down by ag retailers. University of Illinois extension expects these will increase to tighten 2021/22 revenue margins for corn producers who bought anhydrous ammonia this spring and never final fall. Yield beneficial properties will stay prime focus for producers trying to keep revenue margins going into the 2022/23 advertising and marketing yr on this period of upper prices.
There could also be some reduction in Q3, however the window is not going to doubtless stay open for lengthy earlier than fall fertilizer purposes start. So, if farmers see pricing alternatives that align with advertising and marketing plans and operational methods this summer time, it might be clever to capitalize on these earlier than harvest demand drives costs again up.
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