Fertilizer price hyperinflation

February 2007

The price of urea, agricultures cheapest source of nitrogen, has increased by around 50% since the end of October 2006 from around US$210/t to US$300/t and reflects the huge demand emerging for fertilizer relative to the actual capacity of existing plants to produce. Shortages are evident on the sub continent in India and Bangladesh and even affluent markets such as the UK (until after March).

Potash supplies may also come under pressure as a second mine has succumbed to flooding in Canada , the world’s number one supplier of this essential plant element. This follows a similar event in a Russian mine late last year. Judging by the manner in which the share price of the world’s foremost potash producer, Potash Corp. (POT.TO) has inflated over the last 6 months (CA$85 up to CA$175), demand is anticipated to be robust and likely lead to significant price rises.

So it clearly evident capacity constraints are restricting agriculture’s ability to ramp up production simply because price signals have emerged to attempt to do so. The mining boom has shown it is much harder to increase commodity production after years and even decades of restricted infrastructure investment and poor economic returns. In fact since the boom in metals prices begun in earnest a couple of years ago, Australia has not managed to increase output of any of these commodities.

This input cost inflation clearly has ramifications for farmers around the world despite rising prices for nearly all staple food commodities. Incomes have the potential to rise significantly in good years, and bad years will cost a lot more than they have in the past. In other words the risk of farming has ratcheted up to a point where particularly in marginal areas, there is no provision for failure. And with weather risk increasing the need for land use change is now at its greatest in history.

This is why a crop such as sandalwood nuts have a rapidly developing role in the broadacre farming context. A tree crop such as this with a low input requirement bears far less production risk than annual grain crops. And at the same time, still produces a commodity that allows continued exposure to a broader developing food bull market, facilitating a degree of drought proofing and significant reduction in energy consumption. We will continue to see more sandalwood command a role in the Australian landscape as more farmers are forcibly awakened from their slumber.

The battle lines are being drawn – supermarkets vs service stations

September 2006

Global grain stocks are called heading down to dangerously low levels in a report recently released by Lester Brown of the Earth Policy Institute. Lester states:

‘This year’s world grain harvest is projected to fall short of consumption by 61 million tons, marking the sixth time in the last seven years that production has failed to satisfy demand. As a result of these shortfalls, world carryover stocks at the end of this crop year are projected to drop to 57 days of consumption, the shortest buffer since the 56-day-low in 1972 that triggered a doubling of grain prices.’

Wheat stocks haven’t been this low since 1985 and similarly for corn, global stocks have fallen to their lowest level in 25 years. Lester’s calculations also assumed an ‘average’ grain crop in Australia of around 35-40 million tonnes. With dry conditions persisiting over much of Australia’s grain belt that figure could easily head down to 20 million tonnes.

As stocks decline, fierce competition is beginning to emerge for what grain exists in global inventories. And that competition will ultimately be won by the end user that is willing to pay more – food or biofuel manufacturers?

Odds are being taken now and early on it is anticipated that biofuel producers will figure strongly in the acquisition stakes as food manufacturers arrogantly undervalue existing grain reserves. As consumption rates increase and further worsen the global supply situation, food markets will reluctantly, though strongly counter bid, as consumers realise it is probably more important to eat than it is to drive.