Grain SA Fertiliser Report

1 Grain SA Fertiliser Report 2011 Grain SA Fertiliser Report 2011 i EXECUTIVE SUMMARY Introduction As a world market commodity, Fertiliser prices are similarly formed to the prices of most global commodities and supply and demand factors that normally impact most commodity prices. The prices of the main Fertiliser materials reached record levels during 2008 and again decreased sharply during the latter part of 2008. This volatility in Fertiliser prices resulted in various questions being raised regarding whether this was due to fundamental reasons (for example supply and demand) that caused this occurrence or not.

2 Fertiliser as production input contributes on average between 30 % and 50 % to a Grain and oilseed producers variable production costs in South Africa. For this reason, the price that Grain and oilseed producers pay for Fertiliser is a vitally important determinant of the profitability of Grain and oilseed production in South Africa. As South Africa s agricultural industry operates in a free market, primary producers are price takers and cannot pass high Fertiliser prices on to the next user of their produce. This in turn could make Grain production unprofitable in South Africa, which in the long run could lead to food insecurity in the country.

3 For this reason, it is of critical importance that Fertiliser prices in South Africa are a reflection of the fundamental factors driving Fertiliser prices both internationally and locally. Objectives The primary objective of this study was to investigate the structure, conduct and performance of the Fertiliser industry in South Africa. As mentioned above, if Fertiliser prices are not a true reflection of market factors and are being distorted in some or other way, this could negatively affect the profitability and sustainability of Grain and oilseed production in South Africa.

4 A distortion of Fertiliser prices in South Africa could therefore put pressure on the country to maintain and improve food security levels. In order to achieve the primary objective of this study, the following secondary objectives were addressed: Grain SA Fertiliser Report 2011 ii Investigation into the international Fertiliser market in terms of: The structure of the international Fertiliser industry what countries and companies are the largest producers of raw materials and ultimately fertilisers?

5 The long-term supply and demand ratios for fertilisers on international markets. Current and historical factors that have an influence or drive Fertiliser prices on international markets. Investigation into the South African Fertiliser market in terms of: The structure of the South African Fertiliser industry what companies are the largest producers or role-players in the local industry, market shares, profitability and performance Supply and demand in the local Fertiliser industry local production, imports, exports and use.

6 Current and historical factors that have an influence or drive local Fertiliser prices. The price transmission from international Fertiliser prices to local Fertiliser prices. The contribution of Fertiliser costs to local Grain and oilseed producers total production costs and the ultimate effect of volatile Fertiliser prices on the profitability of Grain and oilseed production in South Africa. International Fertiliser Industry From Chapter 2, it is clear that the sharp rise in international Fertiliser prices in 2007 and 2008 was caused by a few global economic factors converging, causing a perfect storm.

7 The main conclusion from Chapter 2 is that it was both supply and demand-driven factors causing prices to increase sharply during 2007 and 2008. The most important factors that affected Fertiliser prices can be summarised as follows: o Nitrogen: Low nitrogen inventories; Higher demand for nitrogen driven by an increase in the area planted to Grain crops; The overall economic situation caused production costs of nitrogen to increase: Brent crude oil prices influenced transport costs and freight rates; Brent crude oil prices influenced the natural gas price which is the main feedstock for nitrogen Fertiliser .

8 And China imposed export taxes which meant that its nitrogen was only available to the rest of the international market at higher prices. Grain SA Fertiliser Report 2011 iii o Phosphates: Higher demand for phosphates due to high Grain prices and larger areas planted to Grain crops; Prices of phosphate rock, sulphur and ammonia, which are the three primary materials used in producing DAP, increased significantly; Brent crude oil prices resulted in rising cost of transport and freight rates; and In contrast to nitrogen, phosphate stocks and DAP prices is not suggesting a strong relation.

9 In fact, stock levels were significantly higher compared to the previous years at the time that prices were at record levels. One can however postulate that very low stock levels in 2006 and 2007 contributed to the increase in DAP prices, and that the industry subsequently reacted by producing more phosphate. o Potassium: The concentration within the potassium industry only a few companies control the stock; High demand caused by an increase in Grain crop plantings; and The start of the MOP price hike in 2007 coincided with a 10 year low in potassium stocks.

10 Although stock levels rebounded in 2008, it was not enough to slow the MOP price increasing until end-2008; As indicated above, there are potentially a myriad of complex and interrelated factors that could affect movements in Fertiliser prices; but in most instances, the exact relation is not entirely clear. It is for this reason that it was decided to determine whether any statistically significant relation exists between the factors mentioned and the price movement of different fertilisers.