Series: Agriculture
Tags: fertilizer, inflation, natural gas, crop, transport
In a post published in November 2022, I showed the main drivers of Alberta fertilizer prices. I also ventured in forecasting fertilizer prices. However, I was dubious of the forecasts as they came when barge rates on the Mississippi River were peaking, natural gas prices were high and the model forecasted fertilizer prices in Alberta to stay high, and even to increase while they were declining elsewhere. Fertilizer prices did not climb in November and December as forecasted but rather stayed flat. This is good news for farmers and I’m glad the forecasts did not materialize.
With barge rates returning toward normal values and natural gas prices dropping to levels comparable to last year, I’m confident the models now produce better forecasts. Let’s see where fertilizer prices are heading in the next six months given the current economic situation.
The fertilizer price data in Figure 1 are from Alberta’s Ministry of Agriculture and Irrigation and USDA NASS. The Alberta fertilizer products are Anhydrous ammonia (82-0-0) full service with applicator, Urea (46-0-0) and Fertilizer (11-51-0). The US fertilizer price is an index (scale x 10) for the whole United States. Fertilizer (11-51-0) tracked well with the US fertilizer price index. This is consistent with the Prairies importing fertilizer from the United States.
Since October, fertilizer prices in Alberta have declined marginally. We will see below whether the conditions are there for the trend to continue in the next six months.
Fertilizers make their way from Southern United States to Canada by barges, trains and trucks. From downbound grain barge rates from St. Louis, I construct a proxy for upbound barge rates on the Mississippi River, for which I could not find data.
Figure 2 shows that barge rates have returned almost to the level observed in early 2022. My forecasts in November considered barge rate to decline but not that rapidly. This is good news for farmers in the Prairies.
I showed in November that barge rates on the Mississippi River are one of the drivers of fertilizer prices in Alberta. I updated the model with the data for November and December 2022. Given that fertilizer prices did not respond strongly to the recent high barge rates, the variables for barge rates lost importance in the model. Nonetheless, barge rates are still one of the main drivers but their estimated immediate effect has diminished.
As an important input in the production of fertilizers, it is not surprising that natural gas prices are important drivers of fertilizer prices. The models consider natural gas prices in the United States (Henry Hub) and in Europe (Dutch TTF). Figure 3 shows that the Henry Hub natural gas price has fallen from its summit in August. Its price is now below where it was a year ago and is comparable to its level two years ago. Natural gas prices in Europe have followed a similar trend.
Forecasting fertilizer prices requires developing plausible scenarios for the models’ variables. The forecasts below assume the following:
Exchange rates, oil prices, barge rates and rail rates stay at their February 2023 averages thus far,
The corn price follows its Futures Forward Curve (FFC),
Three scenarios for natural gas prices (Henry Hub and Dutch TTF):
FFCs: natural gas prices follow their FFCs.
FFCs -25%: natural gas prices decline by 25% from their FFCs.
FFCs +25%: natural gas prices increase by 25% from their FFCs.
Figure 4 shows the forecasts for the three scenarios. In the case of Anhydrous Ammonia, the model forecasts the price to peak in February and then to decline. This is because barge rates work their way in fertilizer prices with lags. If recent history tells us anything about what will happen, the delayed impact of barge rates should be small and if the price of Anhydrous Ammonia increases, it should be modest. For 11-51-0 and urea, the models forecast prices to decline.
If current economic conditions hold, we should observe lower prices for the three types of fertilizer in six months. That would make prices lower than at the same time in 2022, but about 20% higher than in 2021.
I still do not have data for fertilizer prices in Eastern Canada, which depends on fertilizer imported by seas. As far as I know, the 35% tariff on imports of fertilizers from Russia still applies. The Canadian government has shown overture recently to provide aid farmers but refunds do not appear to be an option.
September fertilizer inventories show that Canada is currently in a good position, with stocks of fertilizers comparable to previous years. This is reassuring.
Fertilizer prices are still high, but the conditions are there for them to decline. Let’s hope for these forecasts materialize, and for a highly profitable year for Canadian crop farmers.