Agricultural productivity will outpace food demand in the near term,
Fitch Ratings believes. This will likely result in low grain prices and
farmer demands for reduced costs including rents, fertilizers, crop
protection chemicals, and seeds. For fertilizers, pricing pressure also
comes from a stronger dollar and growing excess capacities that are
expected to persist beyond 2018. We expect greater consolidation in the
fertilizer industry to drive lower costs and de-risk investment in
capacity, new products, or distribution capacity.
Low crop prices stem from three bumper crops in a row and strong grain
stocks. Global agricultural production is expected to increase in the
2015/2016 season and weigh on crop prices and farmer incomes in 2016.
Crops have benefitted from favorable weather and high planting but also
from high performance seed, fertilizer application, and application of
targeted crop protection chemicals.
Brazil is a key agricultural growing region and imports the vast
majority of its fertilizer. In Brazil, farmers are challenged by tight
credit and an over 40% depreciation of the Brazilian real. To some
degree, Brazilian farmers exporting their crops benefit from crop prices
denominated in the U.S. dollar. Brazil's potash imports were down 10%,
monoammonium phosphate imports were down 20%, and urea imports were down
38% in the year through September 2015 compared with the same period of
North American nitrogen fertilizer production benefits from low feed
stock costs, domestic short supply, and inability to skip application.
Domestic production has been consolidating while expansions go forward
to take advantage of low natural gas prices.
North American phosphate fertilizer production exceeds consumption but
can be globally competitive if integrated into quality phosphate rock,
sulphur, and ammonia. Production based on purchased rock has been
Potash production is consolidated in few geographic locations based on
mineralization. North American production costs are higher relative to
production from Belarus and Russia and margins will continue to decline
as new capacity is added.
Weaker farm economics has driven a shift toward lower yielding, less
expensive seeds. Seed prices will need to be re-rated to reflect the
drop in crop prices while pricing the newest higher yielding seeds, at a
premium. Crop protection chemicals are generally suffering sales
declines as generic competition grabs share.
Seed and crop protection producers are expected to continue to engage in
mergers and acquisitions given the need for scale in research and
development as well as germplasm.
Fitch has published its inaugural reports "North American Nitrogen
Fertilizer Dashboard," "North American Phosphate Fertilizer Dashboard,"
and "North American Potash Dashboard" covering industry drivers on www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
North American Potash Dashboard
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