Commodities — Corn, Wheat and Fertilizer (Part 1)

Spend Matters welcomes a guest post from Nick Peksa at Mintec Ltd.

Without a doubt, the largest contributing factor to the demand on the fertilizer market is the world economy and the demand for agricultural produce. This week begins a two-part article looking at the relationship between crops and fertilizer. The starting point will be an overview of the current market trends of corn and wheat. Next week we will concentrate on the factors affecting the fertilizer markets.

Corn and Wheat world production
In global terms, corn production and its main competitor, wheat, have been increasing very steadily over the last 30+ years. However, with the recent demand for biofuels, a large production differential has opened up between the two.

Good weather and a number of other factors are necessary contributions to crop quality. A good fertility program will contribute to a significant portion of the yield. Nitrogen (N)-based fertilizers are viewed as the most important source of nutrients. Depending on the crop, nitrogen fertilizers can improve yields by some 16% (wheat) and 41% (maize).

If you consider the main input costs for farmers, around 30-50% of these relate directly to labor, machinery, seed cost, land and fertilizer. Most of these input costs have been stable over the last 10 years, increasing with inflation; however, fertilizer has more doubled in price. Per acre, the cost of a nitrogen-based fertilizer is now almost double that of the seed cost. So making an educated guess, based on average factors, I would estimate the doubling effect on fertilizer would have caused the price of wheat and corn to increase by close to 6%.

Corn Markets -- overview and recent movements
The major producers of maize are the US (representing over 30% of the world's production), followed by China, the EU and Brazil. The US is the world's largest producer, exporter and consumer of maize and so has a significant influence on world pricing.

Maize prices rose at the start of the month supported by concern over the state of the crop in South America. Continued dryness has been seen in Argentina and Brazil which is likely to reduce potential yields in the region. This could reduce export forecasts as a result.

Global maize output for the 2011/12 season has been revised upwards to 868.1m tonnes, with losses in the US offset by gains in the EU, Ukraine and China. Stocks are expected to increase while demand is likely to be reduced as a result of current high prices seen in this season and cheaper alternatives for feed. The stocks-to-use ratio is expected at 14.8%, a less tight situation than forecasted at the start of the season.

Wheat markets -- overview and recent movements
The main wheat producing countries are the EU (22%), China (17%), India (12%) and US (9%) which account for more than 61% of the global production.

Global wheat supplies for 2011/12 have been revised upwards from last month's estimates due to higher output expected for Kazakhstan, Brazil and Russia. Production in Kazakhstan is forecast to be up 1.5m tonnes due to very good growing conditions boosting production, with record yields likely to be achieved this season. Production in Russia is also expected to increase by 0.2m tonnes this season.

Wheat production in the EU is forecast to have reached 138m tonnes, as dry growing conditions resulted in a 5% fall in production in France and Germany from the 2010/11 levels. But increases are expected in other EU producing countries. EU endings stocks are expected to increase due to a fall in export volumes as increased export competition has been seen this season, with Black Sea producers gaining market share in the export market.

There is certainly one interesting point to draw from this graph -- the peak in fertilizer appears to be later than the peak for the 3-month forward crop price of wheat and corn: this to me looks suspect. Maybe the futures price for wheat is the deciding factor for when to buy fertilizer? If this is the case the fertilizer market can actually be manipulated, we will explore more of this next week.

- Nick Peksa, Mintec Ltd.

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