29 May 2008

Feeding the Earth:

Fertilizers and Global Food Security

Market Drivers and Fertilizer Economics

Used together with on-farm sources such as manures and crop residues, fertilizers provide
the nutrients that farmers need to grow plentiful, high-quality crops to meet the growing world
demand for food, feed, fibre and biofuels. Plants require large quantities of nitrogen (N), phos-
phorus (P), potassium (K) and sulphur (S), but another 9-16 micronutrients are also necessary,
depending on the specific crop. Every harvest removes nutrients from the soil, and fertilizers
help replenish them, thus safeguarding soil fertility and making it possible to keep producing
bountiful harvests.
Recent concerns over the adequacy of global food supplies and the final food costs facing
consumers mean that many people are trying to better understand fertilizer production and the
related economics. This overview is meant to provide a short introduction to major aspects of
fertilizer economics.

Strong agricultural commodity prices drive fertilizer use

Because farmers generally buy fertilizers
on credit that is repaid only when their
harvests are sold, investing in fertilizers
to increase yield and crop quality carries
some risk. Therefore, the price that far-
mers expect to receive for their output
influences their decision to invest in fer-
tilizers. Studies1 have shown that the pri-
ces of agricultural commodities have a
greater influence – as much as 25 times
higher – on farmers’ decisions to invest
in fertilizer than do the prices of fertilizers
themselves.
For this reason, rising market prices for agricultural commodities tend to push fertilizer prices
upward rather than the contrary. The graph above shows that the prices of major cereal crops
started rising before prices for fertilizers did.
1 F. Bel, G.D. d’Aubigny, A. Lacroix and A. Mollard (2004) “Fertiliser taxation and regulation on nonpoint water pollu-
tion: a critical analysis based on European experiences”. International Journal of Water, vol. 2, no. 4, 2004, pp. 247-266.
J. Poulisse (2007) “Increased Fertilizer Use Opportunities and Challenges for Food Security in Sub-Saharan Africa”,
presented at the 13th AFA International Fertilizer Forum. 6-8 February 2007. Sharm El-Sheikh, Egypt.

International Fertilizer Industry Association 28, rue Marbeuf, 75008 Paris, France
Tel: +33 1 53 93 05 00 Fax: +33 1 53 93 05 45/47 ifa@fertilizer.org www.fertilizer.org
29 May 2008

Market forces determine global fertilizer prices

Trade in fertilizers is truly global. IFA counts nearly 200 fertilizer producers among its members,
and the market shares of even the largest companies do not exceed seven per cent of total world
fertilizer production.
Current fertilizer prices are the illustra-
tion of the basic principles of supply and
demand. They reflect a properly functio-
ning, but very tight, global market. The
underlying reason for increased fertilizer
demand is growing incomes in developing
countries, which trigger better diets and
changed food preferences, thus increasing
the demand for agricultural goods. IFA’s
analyses show that South and East Asia
currently account for some two-thirds of
increasing fertilizer use, and Latin Ame-
rica, especially Brazil, also accounts for a
significant share.

Fertilizer markets have become tight because of

underinvestment during lean years
Before the current increase, fertilizer pri-
ces were more or less flat in real terms for
at least 15 years. The same was true of pri-
ces for agricultural commodities, which,
as mentioned above, are a major determi-
nant of the level of fertilizer consumption.
These factors, and political complacency
after decades of cheap food prices, combi-
ned to limit investment in agriculture and
fertilizer production capacity. As a result,
fertilizer capacity expansion – which requi-
res a significant injection of capital and up
to five to eight years of lead time – has not
kept pace with demand. Fertilizer markets
will remain tight until this gap is closed,
especially since production capacity is currently operating at or near record levels.
When medium-term forecasts for fertilizer demand started to indicate positive growth rates
several years ago, the investment level increased. But the rapid increase in income for large po-
pulations (e.g. China) and the sudden interest in biofuel production combined to raise demand
for agricultural output – and thus fertilizers – even faster than predicted.
Building materials, equipment and manpower are in great demand, so construction costs
have risen and timelines lengthened for bringing new capacity online. Crucially, the fertilizer
industry’s current revenue stream makes the necessary investments possible, despite a challen-
ging investment climate.
 29 May 2008

The medium-term outlooks for fertilizer supply and demand presented by IFA in May 2008 indi-
cate that fertilizer markets will remain tight for at least three years.

Energy and mineral commodities are facing similar trends

The energy, mineral and mining sectors have experienced similar price trends in recent months,
but they are under less scrutiny because their products are not directly linked to food produc-
tion. It is important to note that these sectors have an impact on fertilizer costs.
Nitrogen fertilizer production is energy intensive and relies on hydrocarbon feedstocks (espe-
cially natural gas), so high fuel costs drive up fertilizer prices. Energy prices also affect the cost
of shipping bulky fertilizers and their raw materials around the globe, as does robust demand
for limited freight capacity.

Exchange rates influence global market prices

Cross-border fertilizer transactions are denominated in US dollars, which has pushed quoted
prices of fertilizers upwards.

Farm-gate prices depend on many factors besides the price

of the fertilizer product
The delivery price that farmers pay for
fertilizers depends on a number of fac-
tors, many of which are not directly re-
lated to fertilizers. These include inland
transport costs, taxes, administrative
costs, mark-ups by intermediaries and
many others. Where these additional
charges are determined as a percentage
of the fertilizer price rather than a flat
rate, they amplify the effect of higher fer-
tilizer prices.
This graph illustrates the difficulties
faced by African farmers in particular,
especially those in landlocked countries
(like Mali). Numerous transaction costs make fertilizers more expensive in Africa – where soil
fertility is declining at alarming rates – than anywhere else in the world. This means that few far-
mers in the region can afford to replenish the nutrients removed from their fields by each crop
and lost to erosion, a major factor in declining agricultural productivity in Africa.

For further information, contact IFA:

28, rue Marbeuf, 75008 Paris, France
Tel: +33 1 53 93 05 00 Fax: +33 1 53 93 05 45/47
ifa@fertilizer.org www.fertilizer.org