2 Thriving in a vibrant marketplace

Feeding the world’s growing population is one of the most basic long-term challenges. These challenges were exacerbated in 2010 by extreme weather conditions in several important agricultural areas, including Russia, as well as underfertilization in 2009 as a consequence of the global financial crisis. Fertilizers are an important part of the solution. Currently, demand for fertilizers is very strong; at the same time, new production capacity coming on stream over the next few years means that we must constantly find ways to operate more efficiently to remain competitive with our global peers.

Changing diets

Growing prosperity, especially in emerging markets, has led to significant dietary changes. These changes represent not only increasing food consumption per capita, but also greater meat intake. Meat is a resource-intensive source of calories and today nearly half the world’s cereal production is used to produce animal feed. Even without population growth, changing consumption patterns will require more food to be grown.

Source: GRID-Arendal United Nations Environmental Program.

Arable land per capita shrinking

There is a limited amount of land that is suitable to be used in feeding the world’s growing population. Between 1961 and 2007, global population increased 115%. Arable land increased just 10% during the same period. While one acre of land fed 2.4 people in 1961, that same acre must feed 4.7 people today.

Source: UN FAO.

Growing population

Each day approximately 200,000 more people join the global food demand. Population growth is one of the core challenges facing the global food system. Agricultural producers must continue to increase output and efficiency to keep up. We estimate that global farmland productivity will need to rise by 15% by 2020 to keep global food consumption per capita on par with today’s level.

Source: UN FAO.

Soil fertility

Increased agricultural productivity means more nutrients are required to grow the plants that feed us. Each successive crop removes nutrients, which must be replaced in order to secure future production levels. Farmers may take ‘fertilizer holidays’ from P and K nutrients in challenging economic times, but have to compensate with heavier application in subsequent years.

Alternative fuels

In addition to feeding the world, global agricultural producers are a small but rapidly growing source of the world’s fuel. Between 1980 and 2009 the share of US corn used for fuel ethanol rose from 0.3% to 26%. The 107 million tonnes of corn used by US ethanol distilleries in 2009 could have fed 330 million people for one year.

Source: Earth Policy Institute.

	Developments in 2010	Impact
Food	Drought and fires in Russia and Ukraine	Crop output fell sharply in Russia and Ukraine, with Russia imposing a temporary export ban on wheat, while importing potatoes and other crops to compensate for lost production. Normally wheat exporters are self-sufficient in potatoes and other staples, Russia and Ukraine will significantly impact both food supply and demand dynamics in 2010-2011.
	Other important agricultural regions are affected by unfavourable weather	Kazakhstan, a major regional grain grower, was also affected by a severe drought in 2010, with the fall harvest down 32%. Drought has hit grain-growing regions of North Africa. Heavy rains in Australia haven't curbed the size of its wheat output, but have hurt its quality.
	China begins importing corn to meet domestic demand	If a permanent trend, China's corn imports will represent a further burden to US corn producers, who are already directing an increasing portion of their crops to ethanol production. By 2015 China will account for 17% of global corn export demand, from virtually zero in 2010 (Source: BoAML).
	Global food stocks decline to historical lows	Despite the fragile economic recovery, strong global food demand supports higher prices for soft commodities; after a brief pause in 2009-2010, the challenges of increasing agricultural output to feed the world are once again at the forefront.
Fertilizers	Sharp rise in demand from farmers driven by increasing agricultural commodity prices is met by empty supply chain	In November 2010, US MAP/DAP producer stock hit all-time lows (less than 500kt). Additionally, phosphate producers globally were pre-sold 1.5-2 months ahead. In October/November 2010, distributor and customer storage capacities in Western Europe stocking nitrogen products for the next spring planting season were filled at 25-35% compared to the usual 65% for that period. An empty supply chain coupled with the sharp rise in demand resulted in rapidly increasing fertilizer prices.
	Gas price volatility	In 2009, the market observed a decoupling of oil and gas prices from excess pipeline and LNG supply. In the first half of 2010, Western European producers significantly improved their competitiveness as they accessed lower-priced spot natural gas (4.5-6 USD/mmBtu). But in the fourth quarter, spot prices in Europe corrected upwards to 8.5-9 USD/mmBtu driven by supply/demand dynamics. The correlation between gas and oil prices seems to have resumed: LNG producers (e.g. Qatar) have announced postponements in new capacity additions, while the profitability of shale gas projects remains unclear.
	Consolidation and possible new entrants across N, P and K segments	The major consolidation and ownership changes underway among top global players (e.g. CF Industries-Terra, Uralkali-Silvinit) may further concentrate production capacity. At the same time, new entrants in N, P and K nutrient production will continue to put competitive pressure on existing producers.
	Chinese government extends higher export tax period by two months in 2010-2011	The extension of the Chinese higher export tax period for urea/MAP/DAP tightened the global nitrogen and phosphate supply/demand balance.
	Important new planned capacity announcements in N and P	On the nitrogen market, the main expected urea export capacity introductions are from Sorfert (Algeria) 1.2 MMT and Qafco V (Qatar) 1.27 MMT, which will come on stream in the second half of 2011. Consequently, the first half of 2011 should remain favourable for nitrogen products. The main phosphate project on the market, Ma'aden (Saudi Arabia) 2.9 MMT DAP, was postponed and expected to start in the second half of 2011.
Iron ore	Prices continued rising with the physical market showing no signs of slowing	Iron ore prices continued their upward drive and now look on their way to record highs, having reached USD 185-190 CFR China at the end of January 2011. The market has been supported by a tight supply of iron ore from India and Brazil, as well as improving demand from China.