An expected record corn crop in Brazil on season 2021-22 has been boosting the demand for nitrogen. Join Camila Dias, Argus Brazil bureau chief, and Renata Cardarelli, a reporter for Argus Brazil Grains and Fertilizer publication.
They talk about the reasons behind the raise in nitrogen prices and the global supply scenario for the nutrient.
CD: Hello and welcome to ‘Market Talks’- a series of podcasts brought to you by Argus Media about the main events impacting the commodities and energy sectors in Brazil and worldwide. My name is Camila Dias, Argus Brazil Bureau Chief. In today's episode, I talk to Renata Cardarelli, a reporter for Argus Brazil Grains and Fertilizer publication, about nitrogen purchases, which have been boosted by the record estimate for the Brazil’s 2021-22 corn crop. Welcome, Renata.
RC: Thank you, Camila. It is such a pleasure to be here.
CD: The US Department of Agriculture (USDA) estimates Brazil's next corn harvest to reach 118 million metric tonnes. How does that impact nitrogen demand?
RC: Camila, Brazilian demand for nitrogen was already 8 percent higher in 2020 from 2019. Almost 5 million tonnes of nitrogen were delivered to the market in 2020 and analyst believe demand can increase by around 15 percent in 2021 from 2020. It is important to highlight that for the 2021-22 corn crop to reach record production of 118 million tons, it will be necessary to increase planted acreage by 5.5pc, according to analysts, which will inherently strengthen nitrogen demand.
CD: And what about production costs; are they flat compared to the last harvest?
RC: No, Camila, production costs are not flat. In Mato Grosso, the main corn-producing state, production costs with fertilizers were around 735 Brazilian reais per hectare in the 2020-21 crop, up by 7pc from the previous year, according to regional Institute Imea. The outlook for corn production costs with fertilizers for the 2021-22 crop increased to more than 920 Brazilian reais per hectare in May.
CD: Does the devaluation of real against US dollar drive higher fertilizer prices in the Brazilian market?
RC: Yeah, that is for sure, Camila. I mean, the fertilizer market is dollar dominated. Brazil imported about 80pc of the fertilizer consumed last year. Domestic production has no prospect of an increase in the short term, leaving Brazil exposed to imports. Granular urea offers already surpass $500/t cfr Brazil, compared to prices at $290/t earlier this year. Prices have reached the highest level since 2013, but barter rates still remain favorable to Brazilian producers.
CD: Renata, what is the main reason for the barter rate to be favorable to Brazilian producers?
RC: High corn values have favored Brazilian farmers this year. The price of the most liquid corn futures contract is around 60pc higher than a year ago. Corn prices on the CBOT reached the highest level since 2013 this June, which should encourage Brazilian producers to increase the acreage area in the next harvest. The situation is so favorable for producers that there are rumors of a possible corn sowing for the summer crop instead of soybeans in regions such as Paraná and Rio Grande do Sul. It is worth highlighting that those are specific areas, but historically this move is uncommon.
CD: And what about the purchases to meet the producers' needs... Are they faster than last year?
RC: They were in May, Camila. Demand has slowed since but purchases for the 2021-22 corn crop are set to be completed in October-November, which is about two to three months earlier than in the previous crop when negotiations were extended through January. Market participants said nitrogen purchases at the farm level are just more than 60pc of the estimated requirements for the corn 2021-22 cycle, down from the 75pc negotiated in the same period in 2020. In addition to the estimated increase in acreage, buyers were wary about further price increases. An interesting point is that, historically, Brazilian farmers trade inputs for future agricultural production as a way to finance their crops. But spot trade was common this year because farmers have capital.
CD: Are there other factors driving nitrogen prices?
RC: There are a number of factors. India is expected to issue other urea purchase tender in the third quarter and is expected to import around 6.2 million tonnes through the end of the year.
CD: In the US, prices have also been rising, with the anticipation of a tightening of domestic supply. Does this also support a sentiment of rising prices?
RC: Absolutely, Camila. Tighter supply in this quarter also contributes to higher prices. Several maintenances at manufacturing units are scheduled to take place in the US, which should restrict supply in the coming months.
CD: And what is the context in China?
RC: Chinese production between January and May was also 800,000 tonnes below the same period last year. Supply is tight and domestic buyers have priority. Increased Chinese industrial activity and an increase in acreage area led to a higher-than-expected rise in urea consumption in the first half of 2021. Indian demand may not be met by China, where supply is tight due to restricted coal supply and environmental regulations. The coal shortage is caused mainly by Chinese sanctions on imports from Australia. Also, environmental regulations prevented new urea units from ramping up production to full capacity.
CD: Thanks a lot, Renata.
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