If optimistic forecasts for corn, soybean and wheat crop production hold, farmers could pursue strong phosphate application this spring.
After dismal weather in the US and Canada slashed production and increased prices of key grain crops in 2012 , both countries are predicting that 2013 could see key crop prices fall as production levels rise.
Joseph Glauber, chief economist at the US Department of Agriculture (USDA), told the USDA’s 89th annual Agricultural Outlook Forum that prices of corn, soybeans and wheat should fall in 2013 as production grows in response to current high crop prices.
The annual outlook forum is a high-level overview of upcoming seasonal trends and helps set the tone of agricultural markets for the US, the world’s largest crop producer and fertilizer consumer.
The Financial Times reported that Glauber predicted that if the weather becomes milder, corn prices will fall by a third from the current season’s average prices, while soybean prices could decline by more than a quarter.
“We should see record production of corn and soyabeans. That should lower prices,” he also said.
Glauber also acknowledged that market participants may be feeling a “sense of déjà vu” as similar forecasts were given in 2012 before record drought and heat wiped put a record number of corn and soybean crops.
Following the USDA forum, J.P. Gervais, chief agricultural economist at Farm Credit Canada, a Canadian government organization, told the Leader-Post that in 2013, Canadian farmers can also expect to see crop prices slide from recent record highs and return to their five-year averages.
High commodity prices globally are already encouraging producers to expand production by using more fertilizer and increasing productivity, and that is impacting agricultural markets.
Global wheat prices have already fallen, Bloomberg reported, and a report by the Australian government has added to the production growth story by predicting that world wheat prices will fall up to 4.9 percent in 2013 on increasing global production.
Seed and fertilizer producers responding
High crop prices have already shaped the actions of a number of industry producers this year.
Stephen Wilson, chairman and chief executive of CF Industries Holdings (NYSE:CF), is confident that his company is in a position to gain from the current need for increased North American crop production, Agrimoney.com reported.
“Agricultural market conditions are as attractive today as at any time in recent history, and give us confidence in the demand outlook for our products,” he said.
Wilson is using these forecasts of tight supplies of corn, soybeans and wheat to “underpin [his company’s] expectations of high crop prices.”
Agrium (TSX:AGU,NYSE:AGU) has also made the link between crop price levels and fertilizer demand. Agrimoney.com reported the company as saying that “historically high crop prices and production margins” are providing similarly “historically-strong incentive to maximise crop production.”
In particular, a press release from Agrium notes that the tight situation in corn markets — over 1.2 billion bushels of demand will need to be rationed between December 1, 2012 and August 31, 2013 — is “expected to support cash corn prices through at least the first half of 2013.”
Implications for phosphate
While the outlook for phosphate has remained muddied by Chinese and Indian demand in recent months, the growing desire to expand crop production will necessitate a similar increase in phosphate application.
CF Industries expects that “demand [for fertilizers] should materialise later in the first quarter,” and that “[f]ertilizer markets during the fourth quarter [of 2012] were characterised by strong North American demand for ammonia and phosphates.”
As phosphate applications typically occur within the first stage of plant growth, there is a good chance that the prospect of strong crop production numbers will help phosphate producers’ sales this spring.
However, similar estimates for increased phosphate demand were made this time last year — that is, before bearish corn production numbers came rolling in. Close consideration to weather conditions will be important in seeing just how strong crop production expansion turns out to be this year.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.