The government continues to be concerned about fertilizer production and the NDRC recently issued more guidance about power availability for fertilizer producers. The notice tells local economic management departments to encourage producers to sign medium- and long-term contracts with their coal suppliers.
The volatility in thermal coal over the past quarter was a major contributor to the power shortages in China. Futures prices soared nearly 100% in a month and companies that use coal as an input were not able to raise the prices of their products fast enough to keep their margins positive.
In the electricity space, this led some power generators to simply shut down because they weren’t allowed to raise the price of their electricity. The NDRC is now pushing for more companies to establish medium- and long-term supply contract to help mitigate this risk for the fertilizer industry.
Along with this, the NDRC is telling local economic planning departments to make sure the contracts are upheld, because if coal prices rise dramatically then some suppliers might be tempted to scrap the longer-term supply contract and sell at higher spot prices.
After the power shortages, local governments also started prioritizing power demand by industries. In the initial chaotic stages, some small cities just turned off streetlights and traffic signals. Some industries like soybean crushers were worried about their power being cut unexpectedly which could lead to huge monetary losses as the products could be in various stages of processing when the power was cut. The government started drawing up industry priority lists and procedures to make sure any future power shortages would be handled in a coordinated and planned fashion.
Fertilizer supply security
This new NDRC guidance also has a specific carveout for fertilizer producers and says unless there is a force majeure situation, power to fertilizer producers should not be rationed. Specifically, they say as local governments continue to reform the coal-fired electricity markets, “all localities may consider the special nature of fertilizer production as an industry that supports agriculture, and should not regard fertilizer producers as high-energy-consuming enterprises”.
Lastly, the NDRC announcement says that natural gas companies must fulfill their contracts with fertilizer producers and work to increase the supply available. We mentioned in our commentary on Wednesday December 1st, that Hubei Yihua, a large fertilizer producer, announced they would be shutting down production at a facility due to limited supplies of natural gas. That facility has production capacity of 300k tons of ammonia and 520k tons of urea.
New crop planting
The increase in fertilizer prices, and worries about availability, are also spilling over to farmers as well.
Economic Daily, a Party newspaper, said fertilizer prices are the thing that farmers are more concerned about right now and this is affecting their enthusiasm for planting.
Fertilizer prices are starting to ease with the Fertilizer Wholesale Price Composite Index down 1.1% on the month after falling in the past 4 weeks. Urea prices have been sliding as well, the most recent data from the National Bureau of Statistics for mid-November pegged national average cash prices at CNY2,564/ton, down CNY95 from the start of the month, but still up nearly 37% year on year. Urea futures also fell to CNY2267/ton, down from a high of CNY3357/ton on October 12 this year.
Against the backdrop of logistics disruptions and the spread of covid, the government is concerned about food security more than normal, as highlighted by the Economic Daily with a piece out titled “Beware of imported risks of rising international food prices”, and fertilizer availability is a key component of food security.
This concern about fertilizer prices isn’t a reflection of any food scarcity or inflation now. In fact, CPI data for the most recent month had food prices falling. Rather it’s a concern about next year.
China likely had its biggest corn crop ever this year, and much of that was driven by farmers responding to market forces. Corn prices over last winter and into the spring of 2021 were relatively high, so they made the choice to expand production in response.
However, over the course of 2021, many of their input costs rose. Farmers continue to mechanize their operations to get better efficiency, but over the past year diesel prices were up 54% and gasoline (#95) was up 50%. Compound fertilizer rose 43% and pesticides soared 213% during the same period. The price of coal, which is used in some grain drying operations, spiked 76%.
The rise in these input costs will eventually be embedded in farmers’ selling price for their crops. They might have produced a lot of corn this year, but if their costs are up substantially, they will also need to sell at a higher price in order to make a profit. This is part of the reason why Dalian corn futures are at CNY3157/ton (USD496/ton or USD12.59/bu) even though China likely produced its biggest corn crop ever this year.
Global repercussion, higher imports
A potential spike of fertilizer costs in China doesn’t simply affect global agriculture markets because China is one of the world’s largest exporters of fertilizer. Instead, a global repercussion appears if fertilizer prices are high in China, and farmers will demand high prices for their grain.
Consequently, high grain prices in China would stimulate higher grain imports as there will be a margin with domestic prices being higher than import costs from other countries. According to latest USDA estimates, China is expected to import 10 million mt of wheat, 26 million mt of corn, and at least 100 million mt of soybeans in 2021/22 marketing year.