Covid-19 sows uncertainty for fertilizer demand

Author Connor Hyde, Deputy Editor

Fertilizer could be the next commodity to fall victim to the economic effects of the Covid-19 pandemic, as the slump in demand for fuel — and biofuels — trickles down to the US corn crops used to produce ethanol.

Farmers are grappling with swelling grain inventories and collapsing prices as measures to curb the virus undercut the energy industry, likely putting a dampener on 2020-21 output.

Commitments to buy fertilizer this summer for the fall application season are expected to slump from prior years as growers contend with dwindling revenue, and corn acreage faces cuts next season.

One way to look at the affordability of fertilizer is to compare it to the corn revenues farmers make. The amount of fertilizer farmers could buy with one bushel of corn plunged in March, as finished fertilizer prices depreciated at a slower rate than corn values.

Fertilizer affordability is on an upward slope through December, based on corn and fertilizer futures on the CME, but cautious, hand-to-mouth fertilizer purchases are anticipated prior to fall and spring applications for the 2020-21 season. This all makes it difficult for suppliers to gauge demand.

US corn growers face at least a $1.37bn loss in sales revenue after the US Department of Agriculture (USDA) in May forecast an 8pc slump in corn demand from the ethanol sector compared to last season.

Ethanol output in the US fell by half in April from January levels, as fuel demand eroded following various state and federal stay-at-home measures, according to the Energy Information Administration. Corn consumption subsequently eroded at the same rate.

Corn futures ebb with ethanol consumption

Ethanol production began rebounding through May, and front month corn prices have nominally rebounded from four-year lows. But the damage is done, and farmers are now left to market the highest level of corn inventories in 33 years, according to the USDA, which is likely to keep a lid on corn plantings next season.

US farmers, though, have a bevy of federal aid to mitigate financial distress from lost business stemming from the ongoing pandemic.

President Donald Trump has designated more than $30bn of coronavirus aid to US farmers since late March, with an additional $66.5bn under consideration in Congress. But the near $56bn of federal cash payments – between three years of trade aid and coronavirus relief – does not guarantee fertilizer spending will maintain status-quo or exceed prior years, as farm debt continues to swell to historic levels.

Farm debt climbs as working capital falls

Farmer debt in the US this year will deepen by $10bn, or 2pc, from a year ago – setting a new 60-year high – to $425.3bn, and further widen the debt-to-asset ratio for the industry, according to the USDA. Coronavirus and trade aid are expected to be earmarked primarily for immediate farm debt instead of purchasing new fertilizer for the upcoming season. Fertilizer accounts for only about 7-8pc of farm expenses, according to the USDA, and purchases can be postponed or even foregone, depending on the nutrient.

Growers aiming to trim cash expenses and pay down more debt – especially if economic impacts from the coronavirus reach into next year – could plant less fertilizer-intensive crops, such as soybeans. 

Futures trending to favour more soy acreage in 2021

Front-month corn and soybean futures heavily favor increased soybean acreage, and have done so since late March. Corn and soybean futures for 2021 simultaneously tipped to encourage farmers to increase soybean area next season – threatening total fertilizer use during the next 18 months.

Argus North American Fertilizer coverage

The content and analysis in this blog is primarily sourced from the Argus North American Fertilizer service. This service is a market-leading, transparent source of index-quality price assessments for regional and site-specific terminal hubs, and provides essential insight on key developments across the north American market for nitrogen, ammonia, phosphates, potash, sulphur, sulphuric acid and freight.

Learn more about the Argus North American Fertilizer service here.

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