Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
Brazilian Fertilizer Production & The Pursuit of Self-Sufficiency
Jun 14, 2013
As South American agriculture continues to evolve, a movement in Brazil has high hopes of fertilizer self-sufficiency. Fertilizer pricing for corn in Brazil is within a profitable range, garnering an average of 23.2% of new-corn revenue. But the same nutrients are averaging roughly 17% in the U.S. suggesting downside room for Brazilian fertilizer. But the reasons Brazil pays a larger percentage of crop revenue for fertilizers are directly related to transport costs and an upside-down tax policy that favors imports over domestic product.
Between 1970 and 2001, Brazilian agricultural production increased by 3.4 times and fertilizer use increased 4.4 times. The telling feature of this, however, is the fact that during that same period of expansive growth in production and fertilizer consumption, tilled land increased only 1.5 times. In other words, due to increased fertilizer use, crop production has increased while the amount of land dedicated to crop farming has grown much more slowly.
Agricultural officials in Brazil have taken notice, and the next step for this nation, which struggles constantly with transport issues including port strikes and sketchy roadways, is to add to domestic fertilizer production.
Historically, fertilizer production had been limited to areas near ports where imported feedstocks could be easily accessed. But that left the issue of transport to the interior. Since the 1980's, an increased number of production and blending facilities have moved closer to agricultural areas. This helped get fertilizer to the farm with greater ease, but left the issue of transporting imported raw materials from ports to interior processing and distribution facilities.
What Brazil needs most of all is to increase domestic fertilizer production. But the current policy taxes domestic product at a level above import tariffs suggesting Brazil needs to change its tariff policy as much as it needs to build production facilities. State taxes on domestic fertilizers are currently at 8.4% with a mining tariff of 2%. But imports are exempt from those fees.
Vale SA's potash mine produces roughly 10% of Brazil's potash, but that mine is expected to exhaust its reserves and close by 2016. Vale has also opted out of its Rio Colorado potash venture in Argentina which had the potential to provide a solid domestic K source. That leaves Brazil reliant on imports from FSU, China and Canpotex.
A switch in tax/tariff policy would go a long way toward satisfying crop production demand for nutrient. Improvements to infrastructure in the interior -- specifically road improvements -- would also help mitigate transport costs. But Rio is hosting the 2014 Soccer World Cup and the Olympic games in 2016 and preparations have diverted resources and construction cash toward preparations for these events.
The United States is in the process of adding 6 million tons of annual nitrogen production in ag-intensive regions. This is expected to keep corn growers in America close to much needed nitrogen supplies, and may lower the price of retail fertilizer. Brazil's tax policy coupled with the massive expenditures necessary to host a World Cup and the Olympics will continue to hamper growth in the fertilizer industry.
Meanwhile, Brazilian corn production improves by the season and growers are taking a closer look at soil nutrition, and profiting from its benefits. World nitrogen supplies are currently high and China and Ukraine will keep Brazilian crops thriving. Phosphates from the U.S. and Middle East are sufficient to meet Brazilian demand, and PotashCorp eyes export opportunity for its bulging stores of K via Canpotex. But moving forward, Brazilian officials must make fertilizer production a priority over pet projects and sporting venues in order to fully realize that state's agricultural production potential.
Photo credits: Foter.com