Yara International hit back at concerns that lower crop
prices may undermine fertilizer use, terming as "strong" the incentive for
farmers to apply nutrients, as it unveiled earnings ahead of forecasts, helped
by lower gas prices.
The Norwegian-based group, the world's biggest producer of
nitrogen fertilizer, said that even though crop futures markets suffered some
high profile price declines, food prices were only 3% lower than a year ago,
and above the five-year average, on United Nations Food and Agriculture
"Wheat prices are only modestly lower than a year ago," Yara
And although the world is set to see a further recovery in
world grain stocks in 2014-15, when adding in raised consumption too, inventories
will end the season equivalent to 78 days' consumption – up only 1 day year on
Comparisons of world crop stocks and demand, in indicating
the extent of competition for supplies, are viewed as key agricultural commodity
"The global farm margin outlook and incentives for
fertilizer application remain strong overall, despite a decline in grain prices,"
"Fertilizer demand remains robust."
The comments follow cautions from commentators such as Goldman Sachs that falling crop prices boded ill for nutrient use, prompting farmers to
curtail costs – a trend already noted in sectors such as agricultural
machinery, attested to by Manitou last night.
Corn prices are deemed, for most farmers, well below
production costs, estimated by Macquarie at $4.12 a bushel in the key producing
state of Illinois.
Yara said: "Although grain farmer margins are lower than a
year ago, for corn in particular, they are still supportive for fertilizer use,
as commodity fertilizer prices have declined as well."
However, the group highlighted that was particularly strong
for "higher quality fertilizers", such as nitrates and NPK – a combined
nitrogen, phosphate and potash nutrient – and from sectors such as meat and
dairy, where lower crop prices are a boost to margins.
'Poor margin picture'
The comments came as the group unveiled 22% rise to NOK2.29bn
in earnings for the April-to-June quarter, on revenues up 0.4% at NOK23.3bn.
Prices of urea, a benchmark nitrogen fertilizer, remained
under pressure from strong exports from China, with average values down 12.6%
year on year at $299 a tonne, although there are signs of stability at these
values, which are below cost of production for major Ukrainian producers.
In Ukraine, "political turmoil has added to the poor margin
picture, and urea exports during the four first months this year are 43% lower
than last year", with shipments of ammonia, another nitrogen product, down 50%,
"A substantial proportion of urea capacity in Ukraine
remains curtailed, amid the unresolved situation on gas supply and price," the
group added, a reference to disputes over supplies from Russia.
Even in China, the fall in nitrogen prices has left "highest
cost producers… suffering losses", meaning they are "forced to curtail production",
Indeed, the price of anthracite coal, the key raw material
for Chinese nitrogen plants, "remains the key driver for global commodity
nitrogen prices going forward".
Current urea export prices of about $260 a tonne are "likely
representing a breakeven level overall" for Chinese producers, whose surging
exports – which near-tripled in the first five months of 2014 to 3.8m tonnes – have
been a prime cause of the collapse in sugar values.
Indeed, Yara was finding itself gaining a competitive advantage
from a drop in its own energy costs, down 18.8% during the quarter, a result of
a decline in European gas prices.
The group forecast its energy costs falling NOK950m in the current
quarter, compared with a year ago, and NOK700m in the October-to-December
Ahead of expectations
Yara reported operating profits of NOK2.85bn for the
quarter, up from NOK2.65bn last year, and above forecasts for a NOK2.73bn
Nonetheless, Yara shares fell 3.0% to NOK285.40 in morning
deals in Oslo.