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RSS By: Davis Michaelsen, Pro Farmer

Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.

Peak Phosphate -- In Case You Are Sleeping Too Well

Apr 05, 2013

In case you don't have anything to keep you up at night worrying, world market watchers have been muttering about something called 'peak phosphate'. While nitrogen is the number one crop input for corn growers, phosphate has garnered a great deal of attention as world supplies of this finite resource dwindle in the face of increased demand for food and fertilizers.

Phosphate rock is dug out of the ground in several countries, but China, the United States and Morocco lead in global phosphate production. It takes 3.5 tonnes of phosphate rock and 3 tonnes of sulfuric acid to produce a single tonne of phosphoric acid -- a building block of DAP/MAP.gaslight 3 l

Some experts believe we may see phosphate resources dangerously low as soon as 2030 and as population growth estimates rise each year, more and more people will belly up to dinner tables and demand more food.

Really, the idea causes as much concern ahead of a total phosphoric depletion as after. Once production becomes more expensive due to declining feedstock supplies -- mined phosphate rock -- the price will first become to high for end-users to afford causing a demand crisis. At that point, producers will either have to produce phosphate at a fiscal deficit or go out of business.

Peak oil is a theory from 1949 used to describe and predict the point at which crude oil production pricing and supply/demand features fail. Like peak phosphate, the assumption associated with this is that oil is a finite resource and must, therefore, one day deplete as a result of human activity. Once the peak of profitability by oil producers has been reached, the diminishing amounts of resources will drive demand higher and low supplies will take prices to a level beyond what end-users can afford.

In the case of oil, this theory has become less in fashion as fracking unlocks a whole new world of energy resource potential, and the global supply does not seem so threatened from the U.S. perspective. In 2007 the peak oil theory was imposed on phosphate rock . When one considers that phosphate rock is a resource that will one day run out -- and has no known substitutes -- it can be easy to start to worry.

The case for Peak Phosphate --

The current dogma predicting peak phosphate projects the United States to deplete its phosphate reserves within 30 years at current extraction rates. The U.S. Geological Survey (USGS) notes that extraction rates generally increase by 2% each year. According to peak phosphate, that would deplete U.S. reserves in about 50 years -- at 3% growth, 45 years. Including China and Morocco along with the United States, a 3% annual extraction rate increase would deplete global supplies in just 75 years.

This line of thinking labels phosphate the 'main determinant of global economic development.' Developing nations -- India as an example -- already cannot afford to fertilize crops properly as a result of government price fixing. Government subsidies favors urea so heavily that P&K are priced out of the market. The ramifications for a global phosphate production peak suggest developing countries would be subject to famine and skyrocketing food prices by 2030.

China has already imposed a 135% tariff on phosphate exports in an effort to establish some control over their national supply. The U.S. signed a 2004 deal with Morocco for long-term access to Moroccan phosphate rock to insulate against waning U.S. supplies. In fact, some have proposed that we could one day see something similar to OPEC where phosphate producers would band together worldwide to stabilize markets and ration supplies. Discussions about recycling phosphate from watersheds and human excreta have begun, but the technology research is at the blank-slate level right now, and so far, no technological advances have been brought forward, much less put in place in point and nonpoint sources of recyclable P.

In other words, the sky is falling and we are all going to starve to death without enough DAP to feed the planet.

The other side of the table --

Experts on the other side of the table disagree. According to USGS data, U.S. phosphate mining capacity at the end of 2012 was set at 34.7 million tons per year. Phosphate rock was mined by 6 companies and 11 mines in four states and import reliance has fallen to just 5% of consumption of finished P products -- 13% in 2011 and 16% in 2010. 85% of this domestic P came from Florida and North Carolina with the rest produced in Utah and Idaho. The same USGS report puts world production capacity at 220 million tons per year in 2012, but notes expansions and new projects increases global capacity to 256 million tons per year. USGS states along with this data that additions to production capacity and newly found reserves in Peru and Morocco will keep the market supplied with phosphate at projected rates for as much as 1000 years.

A more accurate assessment would call peak phosphate 'plateau phosphate'. But this production plateau is nothing new. Supply/demand features will still have their roles, but rather than supply driving demand in a shortage panic, demand will drive supply as producers will mine phosphate only as needed. If we look to Saudi oil production -- as we often do -- one of the principal features of Saudi's production is the ability to adjust output based on demand and pricing. It sounds a little like the tail wagging the dog, and it is.

Remember PotashCorp's shutdowns as inventory outran demand late in 2012. We could actually call that a 'mini-peak potash' -- but the potash market made the necessary correction and, while workers in Saskatchewan had a rough Christmas, the market has recovered, and production resumed.

Phosphate will plateau when end users strike price resistance, and that will slow production. In time of high demand, production will simply ramp up a little and make more DAP when the price is right. As the phosphorous tail wags this dog, consumers may actually see phosphate pricing fall as production (supply) becomes more and more slavish to demand. Reports in this camp hold that production levels will flatten out, following population growth trends. The explosive population growth that inspires this conversation is projected to slow to almost zero by 2050, leveling off global P demand -- indeed, trends have already shown population growth to be easing a bit.

What does it all mean? --

There is a lot of bad information out there on this and even more speculation toward global disaster. Much of the data collected and used to support the idea of peak phosphate comes from a tricky time in fertilizer's history -- the collapse of the Soviet Union, 2008's fertilizer crisis, and a time when ammonia prices held U.S. DAP/MAP production costs high enough to drive increased reliance on imports. The data these little red hens are using to say the sky is falling actually prove phosphate rock's ability to endure. Global production capacity is high enough that production is nimble and can shift according to supply fundamentals. Like Saudi crude production, phosphate production works only as hard as the market requires.

There are those who predicted we would reach peak phosphate in 1988 -- and again in 1989. Prices were to have made DAP too expensive to spread, but the sky did not fall then and it is not falling now.

If you feel inclined, there are some actions you can take to do your part in saving this vital resource. The most obvious is to spread manure. A great deal of organic P comes with consistent application of manure and test plots have shown that, in the right kind of soil, manure can almost completely replace applications of DAP/MAP. The other natural safeguard against P depletion is the fact that phosphate tends to be very inactive in the soil profile. The only real P losses one can expect are to the plants themselves. The leftover is still there when the next crop goes in so between manure and carryover, DAP may actually find itself struggling to find demand as it is.

If corn prices don't show a little positive news, expected new-crop revenue will have more growers focusing on nitrogen and letting P&K slide until returns look a little more favorable. This would also limit demand and slow resource depletion. But the U.S. Geological Survey is convinced and confident that the world has enough phosphate rock to continue making DAP for 1000 years. The International Fertilizer Industry Association (IFA) agrees with USGS and offers a great resource titled 'Debunking Ten Myths About Phosphate Rock Production'.

We will look at peak oil in future posts, but for now, do not believe the hype put forward by bad data and investor enthusiasm about peak phosphate. Of course best management and nutrient reduction strategies all include a whisker of conservation and best practices are what is best for all of us. In the meantime, with peak phosphate no longer a concern, you will just have to rely on corn prices to keep you up at night.

Photo credit: WadeB / Foter.com / CC BY-NC-SA



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