How does the fertilizer market affect commodity production?

Learn more about the relations between the fertilizer market and the production of agricultural commodities, and how changes in supply and demand for these inputs can impact the entire global chain.

September 4, 2023

hEDGEpoint Global Markets

The fertilizer market is directly related to the production of agricultural commodities. This is because fertilizers are critical to enrich the soil with essential nutrients for plant development.

Thus, they play a vital role in agribusiness, improving both productivity and quality. Disruptions in the fertilizer supply chain can impact crop planning, production costs, and the consumer’s table.

In this scenario, it’s essential to better understand how the fertilizer market influences commodity markets, and what the relevance of risk management is. Continue reading to find out!

What are fertilizers?

Fertilizers contribute to the nutritional enhancement of plants, enabling their growth and development. They consist of mineral or organic, and natural or synthetic substances, with the role of providing one or more plant nutrients.

 It’s practically impossible to promote agricultural production without using these inputs. The choice of the appropriate fertilizer depends on aspects such as soil characteristics and the crops cultivated. In agriculture, three macronutrients stand out:

  • Nitrogen (N): Vital for leaf growth and protein formation
  • Phosphorus (P): Critical for the development of roots, flowers, and fruits
  • Potassium (K): Needed for the general growth of plants, in addition to disease resistance and the regulation of water absorption.

Together, they form the abbreviation NPK, standing for the mixture that contains nitrogen, phosphorus, and potassium, three essential nutrients for plants, in different proportions. For this reason, there are several fertilizers on the market that consist of them.

What’s the importance of fertilizers in commodity production?

We’d like to highlight the key points below that elaborate the fertilizer market’s importance in commodity production.

  1. Productivity

Proper fertilizer application can significantly increase crop production. A balanced nutrient supply promotes vigorous plant growth, resulting in bountiful harvests.

Given population growth on a global scale, agricultural production needs to be more and more efficient to ensure food security. Fertilizers are necessary because they enable more intensive cultivation and strengthen productivity on limited land areas.

In addition, they can be directly and quickly applied to correct nutritional deficiencies in plants, hence avoiding production delays and health problems in crops.

  1. Harvest Quality

Fertilizers help raise crop quality and are capable of changing characteristics such as the color and size of the products. This is especially important to meet consumer demands for safer, higher-quality agricultural products.

  1. Crop Rotation

They also permit crop rotation and agricultural diversification, as they can address the lack of soil nutrition, helping to improve fertility.

  1. Soil Optimization

 Fertilizer use promotes positive effects on the physical properties of the soil. Plants that receive nutrients in adequate amounts grow more favorably. In addition, a greater amount of root and plant residues return to the soil and expand organic matter, improving soil aeration and water infiltration rates.

What factors interfere in the fertilizer market?

Several factors can interfere in the fertilizer market, influencing demand and supply, and subsequent price formation.

Fertilizer demand is linked to agricultural production and the climatic conditions of the harvest. When a crop suffers due to unfavorable weather phenomena, the demand for inputs consequently decreases. In this way, fertilizer prices tend to decrease.

Advances in agricultural technology may also impact the fertilizer market. More efficient and accurate handling techniques lead to more targeted applications, reducing demand and waste.

Subsidies, tariffs, and government regulations move the import, export, and use of fertilizers. Policy changes can modify production costs and the final prices of agricultural products, as can exchange rate movements. Farmers may decide to focus on savings and buy fewer inputs.

Raw material costs applied in fertilizer production, such as natural gas (used to form nitrogen) and phosphate, also affect prices: if there’s a lower fertilizer supply due to a shortage of natural gas, and producers need the input, prices will rise.

The fertilizer market involves a complex combination of economic, agricultural, climatic, technological, and regulatory aspects, all of which interact dynamically. When fertilizer supply chains change, commodity markets react on a global scale, and vice versa.

How do these factors affect global commodity markets?

In order for us to understand how changes in the fertilizer market cause repercussions in global commodity markets, let’s look at two practical examples.

  • China After the Pandemic

In 2021, China felt the strong effects of an energy crisis generated by a high demand for energy during the pandemic recovery period.

Increases in international prices for natural gas and restrictions on energy production from coal coincided, as the country aims to reduce carbon emissions by 2030. China is the world’s largest producer of nitrogen and phosphate fertilizers, and the second-largest nitrogen supplier to Brazil. Thus, it occupies a leading role in exports.

Given its smaller production, the fertilizer produced in China came to be designated for internal supply. The consequence? Fertilizer prices rose sharply due to the unchanged demand.

Countries like Brazil needed to find alternatives. Many other producers raised their product prices to compensate for possible losses. According to Cepea (the Center for Advanced Studies in Applied Economics) by USP/Esalq, high fertilizer prices in 2021 were one key reason for elevated food prices, in addition to logistical issues and crop failure due to unfavorable weather.

  • The War between Russia and Ukraine

The second example started with the war between Russia and Ukraine in 2022. The world fertilizer market already faced a series of price increases throughout 2021 and became even more apprehensive due to the conflict in Eastern Europe.

Russia is the world’s largest producer and exporter of NPK, holding a 16% share of all the compound consumed in the world. When the war began on February 24, 2022, fertilizer prices rose dramatically until the end of March.

With the European Union sanctions imposed on Russia, buying fertilizers from that country became practically unfeasible. This forced nations to find other suppliers and optimize domestic production, thus changing the dynamics of the entire supply chain.

Price increases in 2022 resulted in the destruction of global demand. The low supply raised prices and led producers to reduce fertilizer purchases. In Brazil, 41 million tons of fertilizers were consumed in 2022, a decrease of 10.4% compared to 2021 consumption, according to Anda.

hEDGEpoint: A deep understanding of this complex scenario

As you can clearly see, the fertilizer market is subject to price variations due to events, such as wars, that transform supply and demand. Producers must use specific tools to hedge against this volatility.

hEDGEpoint offers you hedging products, including instruments such as the use of derivatives, to better manage commodity sector risks. With global operations, we understand the numerous factors that can cause significant changes for negotiators.

Talk to a hEDGEpoint professional today to find out more!

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