Fertiliser prices: Analysts make a call on when rates will fall

Farmers say profit margins will tighten as fertiliser prices surge. But experts reveal reasons for hope.

Ian Farley, Jabuk, says high fertiliser prices may take the shine off skyrocketing property prices. Picture: Matt Turner

Farmers can expect to pay well north of $1000 a tonne to secure key fertilisers well into next year’s cropping season following an extraordinary rally in the cost of the crucial input.

And the price hikes are expected to have implications on the amount of crop sown next autumn, farmers say.

Soaring global energy costs, and supply chain disruptions caused by everything from hurricanes, high global demand and political interventions, are behind the spiralling prices, which in some instances have almost tripled in the past 12 months.

New modelling shows the spot port price for imported urea could hit $958 a tonne this month or about $1058 a tonne on farm.

Urea has risen the most in the past 12 months. In October last year it was priced at around $393 a tonne, moving to $513 a tonne in May.

Key phosphorus fertiliser DAP is expected to cost growers $1050 a tonne — up from $522 a tonne last October and $748 a tonne in May.

Some producers are already planning to scale back fertiliser use next season, or, in some cases, rest land instead of sowing a crop.

Rupanyup producer Andrew Weidemann said while fertiliser would be available, with domestic plants ramping up production, it would still be subject to global price trends.

He said most farmers were planning on applying 30-40 per cent less fertiliser than normal, and a lot of Australia’s marginal country would be “uneconomical” to crop at the increased prices.

“There will definitely be a reduction in the crop area next year,” Mr Weidemann said.

The rise in inputs and squashed margins was also likely to see a “lot of corporates that have bought land, now exit as they cannot make a return on investment for their assets”.

Large-scale sheep and grain producer Ian Farley, of Jabuk in South Australia, said the steep hike in input prices would make cropping unviable on some of his country.

“We’re big fertiliser users, I bought 1000 tonnes last year, some of the farms we have bought recently had a fertiliser deficit,” Mr Farley said.

“But if input costs are too great I just won’t crop 2000 acres of it next year, I’ll give it a rest, the risk is too great to fork out for these high input costs and you might not get a return.

“The risk is what if you don’t get the rain, or if commodity prices come back; at $1000/tonne, you baulk at that.

Ian Farley says rising fertiliser costs will directly impact how much crop he sows. Picture: Matt Turner

“I cannot work out why people aren’t thinking about these input costs, people have lost their heads on land prices that are through the roof and inflation is taking off and interest rates will go with it.”

Thomas Elder Markets analyst Andrew Whitelaw said DAP and urea were the most-commonly used fertiliser in Australia. About 65 per cent of DAP, and similar product MAP comes from China while urea is mostly sourced from the Middle East.

“There are a whole host of factors influencing prices; but the first is energy costs which have risen at an even faster rate than fertilisers,” Mr Whitelaw said.

Energy shortages and high gas and coal prices had caused some fertiliser plant shutdowns in the UK and Europe.

Meanwhile, China has gradually increased restrictions on fertiliser exports to lower costs for its farmers. Mr Whitelaw said China’s “unofficial ban on Australian coal” created unreliable electricity supplies that also hampering production.

Hurricane Ida in the Gulf of Mexico has damaged production infrastructure.

On a global level, China accounted for 25 per cent of global trade of MAP, on average, and half of globally traded DAP. On urea, Australia relies less on China, which accounts for just 14 per cent of imports, with most sourced from Saudi Arabia and other Middle Eastern nations.

Mt Whitelaw said alternative sources of DAP and MAP were local Australian producers, as well as plants in the US, Morocco and Mexico — but it all came down to price, with China favoured due to competitive rates.

He said looking to the planting of next year’s winter crop, prices are expected to be even higher than $1000 a tonne.

“The concern really for farmers is the cost-price squeeze on inputs and outputs,” he said.

“It is a question of whether they can still make money.” It would be likely that fertiliser would be available, but “at what price”.

New York-based fertiliser analyst Chris Lawson, of global commodity data research company CRU, said supply chain disruptions created a supply shock that pushed prices “incredibly high”, while the impact of the Chinese ban was yet to be felt.

Mr Lawson said the prices were yet to cause demand destruction, “(but) we are in dangerous territory now”.

He said farmers were unlikely to cut nitrogen applications, as it was crucial, however, they may reduce phosphate.

While fertiliser prices were not expected to ease before Australia’s next winter crop was sown, Mr Lawson forecast a correction was likely “in the second half of next year”.

However, that price correction was not anticipated to see prices return to lows of 2020.

And while policies to address climate change were expected to impact on fertiliser manufacturing, Mr Lawson said that was “a longer-term effect” and not likely to be seen within the next two years, but perhaps within a decade.

He said the high prices gave manufacturers a big incentive to produce more product, and China was expected to eventually resume exports.

Meanwhile, Mr Whitelaw said gas and coal derived energy costs could be pushed higher in the longer-term. As the world transitioned towards renewables, he said higher fertiliser prices could be seen, as coal and gas was moved away from production, unless alternatives were found, which was likely in plans for 10 years and beyond.

“The world isn’t completely ready for the renewable (energy) environment and as far as I’m aware there are not any renewable energy driven fertiliser plants — if it was profitable to do it, someone would,” he said.

All of this pointed to higher input costs for farmers and a greater squeeze on the profitability of farming enterprises.

“It could lead to the rationing of fertiliser use,” Mr Whitelaw said, which could then drive down yields, leading to impacts on global food supplies with Third World countries carrying the brunt of rising food prices.

“It has to be a balancing act — the move towards renewable and ‘green’ energy and the impact that this will have on (global) food production,” Mr Whitelaw said.

Locally, a recent investigation released by ABARES, reviewing 20 years of farm profitability in Australia found in real terms, the profitability of farming, as a ratio to the costs of the assets required for it, continued to fall as factors like rising input costs curb how much money farmers can make from farming land.

The statistics come from a major benchmarking study surveying 37,000 farmers across Australia, conducted by ABARES in conjunction with Meat and Livestock Australia.

The study pointed to generally improved returns for livestock producers, but, declining returns on assets managed over the two decade period.

A large factor in this was rising property prices which are often getting out of step with the land’s ability run enterprises profitable enough to service the cost of land — the productive capacity of farmland.