Energy, fertilizers, agriculture – Market prospects and interaction
John Baffes, Senior Economist, World Bank (Development Prospects Group) and a speaker at the 10th GPCA Fertilizer Convention, talks to GPCA Insight about rising global food demand, food security, and the economic prospects for the fertilizer and agricultural markets.
Meeting rising global demand for food and achieving food security is part of the UN’s Sustainable Development Goal 2. How does the interaction between the energy, fertilizer and agricultural markets help the industry’s efforts to achieve this?
Achieving UN’s Sustainable Development Goal 2 implies more food production (the easy part) and access to food by all (the difficult part). Following the past decade’s high commodity prices, producers responded by investing and thereby generating a supply response, mostly through higher yields. The supply response was also helped by lower energy and fertilizer prices, especially after 2014. However, that did not mean that all people, especially the poor, gained access to food. For example, the UN Food and Agriculture Organization reported that following a decade of food security gains, the number of undernourished people increased from 785 million in 2015 to 812 million in 2017.
Given that agriculture and, especially, fertilizers are energy-intensive industries, lower energy costs mean that supplies for both agricultural commodities and fertilizers should be adequate to meet food requirements. However, three key questions for policy makers and market participants to consider are: (i) Are food supplies close to where they need to be? (ii) Are these supplies reaching poor consumers, who typically live in remote rural areas or in the slams of large cities? (iii) Can these consumers afford to purchase food? The twin challenge, therefore, is: for the industry to ensure that inputs such as fertilizers reach areas where agricultural production is supposed to take place; and for policymakers to ensure that adequate investments and appropriate policies will enable producers to access fertilizers and poor consumers to access food.
What are the economic prospects for the fertilizer and agricultural markets in the short- to medium-term?
After reaching historical highs in 2011, prices of most agricultural commodities, especially grains and oilseed, have declined, mostly in response to good supplies, which in turn are a result of investment during the price boom years. Indeed, the World Bank’s food price index currently stands 32% lower than its early 2011 peak. Similarly, stocks-to-use ratios, a measure of supply availability relative to demand, for key grains such as wheat, maize, and rice, have reached record highs during the past three years (the ratios have almost doubled since their lows a decade earlier.) This implies that the global grain market could “absorb” a bad crop without causing a price spike. Good supplies combined with moderate demand growth (estimated to be similar to population growth) suggest that prices are likely to remain weak for the short and medium term. For example, in the April 2019 update of its Commodity Markets Outlook, the World Bank projected the food price index to decline 3% in 2019 and 2% in 2020 from its 2018 levels (since April, commodities prices have declined further). Fertilizer prices, which halved between 2011 and 2016, are expected to be stable in the short and medium term, for the most part reflecting the moderate supply growth of agricultural commodities and lower costs of energy.
With sanctions and trade tensions, supply disruptions and environmental policies, what does the World Bank see as the biggest macro-economic risks/challenges affecting or potentially affecting the agri-nutrients industry outlook at present?
Trade tensions and environmental issues, especially how countries respond to climate change, are two of the most important risks related to commodity markets. Currently, trade tensions have only affected one commodity—soybeans—in a limited way. However, if trade tensions “target” other commodities or spill beyond China and the United States, agricultural commodity prices (and hence, fertilizers prices) could be subjected to strong downward pressures. Such tensions could also materially affect trade flows through trade diversion, changes in crop patterns, and consumers engaging in substitution. Indeed, when China retaliated against the United States by imposing a 25% tariff on imports of soybeans, importers from China turned to South American producers, especially Brazilian suppliers. Not surprisingly, US farmers planted more maize instead of soybeans while China’s soybean importers began using maize in lieu of soybean meal and palm oil in the place of soybean oil.
Climate change, the second key risk, could affect where commodities are produced and how they are traded. If production patterns change, nutrient requirements are likely to change. Therefore, the key challenge for the nutrient industry (and agricultural supply industries in general) is to come up with products that will be compatible with these new production patterns.
“Given that agriculture and, especially, fertilizers are energy-intensive industries, lower energy costs mean that supplies for both agricultural commodities and fertilizers should be adequate to meet food requirements.”