Volatilities in the fertilizer markets present both challenges and opportunities for market participants in Asia

05:26 PM @ Wednesday - 19 June, 2024

Fertilizer is generally used to supplement one, or a combination of the three essential plant nutrients - nitrogen (N), phosphorus (P) and potassium (K). Among the three, nitrogen helps increase protein content in the crop and is the most widely sought after nutrient in terms of tonnage. Ammonia, urea, and ammonium sulfate are some examples of the commonly used fertilizers containing nitrogen. Urea is perhaps especially important as the single largest nitrogen fertilizer market traded internationally.

Asia Pacific plays an important role in the global fertilizer market. The strong population growth in the region is one of the main factors to support fertilizer demand growth. In fact, he two largest populated as well as fertilizer consuming countries, China and India are both in the region. China is also the top agricultural producing country in the world harvesting more than 650 million tons of food grain every year. Agriculture and related industries are China’s key economic activities, contributing about one-sixth of the country’s GDP. Owing to the vast agriculture sector, the country operates a sizable fertilizer industry with a complete supply chain. China is therefore a main producer of various types of fertilizers and a major supplier in the global fertilizer markets. China is also the world’s largest producer of urea and a key exporter to other urea consuming countries globally.

Heightened volatilities in fertilizer prices call for risk management

Proper use of fertilizer can improve crop yield and has a direct impact on farmers’ profitability as well as food security. Therefore, countries with large agricultural sectors tend to have corresponding policies monitoring the use and availability of fertilizers which in turn impact the price. Other than government policies, fertilizer prices may also be influenced by geopolitical events, weather, as well as prices of agricultural products and costs of raw materials like natural gasi. As such, price fluctuations are common in the market. The volatilities therefore pose challenges to firms as profits are impacted by price changes which are hard to foresee. Furthermore, while globally fertilizer prices tend to move in tandem, different locations and products are imbedded with own supply/demand dynamics and hence might react to market events divergently. The change in the relationships between the different key fertilizer prices also creates the needs for risk management and trading opportunities.

For instance, during 2021 and 2022 a series of market events including demand recovery, supply disruption and geopolitical conflict had led to price rallies in fertilizer markets. The US Gulf urea price, for example, climbed from below $450 per metric tonne in September 2021 to over $800/t in two months. After a sharp correction to $540/t level, the price then increased tremendously again to reach an all-time high of over $950/t after the outbreak of Russia-Ukraine war, followed by a quick retreat to below $500/t in June. The Egypt urea price reacted even more to the geopolitical conflict, surging over $1,100/t in March 2023 before falling to $700/t level. The urea benchmark for the APAC region, the FOB China market also exhibited similar volatility, showing extreme upward and downward price movements during the period of Q4 2021 to Q2 2022.

Heightened volatilities in key urea pricing points (price in $/tonne)

Price trends in other key fertilizer markets

Development in exchange cleared fertilizer derivatives

CME Group has a long history running world class agricultural derivative markets including global benchmark products such as CBOT Wheat, Soybean, and Corn markets. CME Group also offers a range of fertilizer futures and options contractsii covering major geographic pricing points for urea including the U.S., Egypt, Middle East, and Brazil. Other than urea, contracts are also available for diammonium phosphate (DAP), mono-ammonium phosphate (MAP) and urea-ammonium nitrate (UAN) markets. However, there are some key differences between the fertilizer and the flagship CBOT contracts mainly in two ways.

Firstly, CME Group fertilizer futures and options are typically transacted as block trades in larger trade sizes. While these products are available on the CME Globex electronic trading platform, most of the trades are executed via the voice brokers who match bids and offers in the market. These privately negotiated trades are then submitted to the exchange for clearing.

In addition, the fertilizer futures contracts are cash settled, unlike CBOT Grain and Oilseeds markets that are physically delivered. Cash-settled contracts are not physically tied to the underlying commodity. At expiration, open positions in the contracts are settled by cash payment (debits or credits) based on the final settlement instead of delivering/receiving the physical goods.

The final settlement prices for the CME Group fertilizer contracts are based on the price reported by price reporting agencies (PRAs). PRAs are firms that assess the fair price of commodities and report these values to a wider audience. The use of PRA assessments for physical and financial transactions are common in the energy and metals and is increasingly important in agriculture. In the case of CME Group fertilizer contracts, the final settlement prices are derived from the daily or weekly assessments from two PRAs, Profercy and ICIS. The Exchange collects both assessments and removes the highest and lowest numbers regardless of source. The final settlement prices of the futures contract are the arithmetic average of these remaining numbers published in the contract month. Read more details about how final settlement prices of CME Group fertilizer contracts are determined hereiii.

The fertilizer markets on CME group have seen tremendous growth since its inception in late 2011, with compound growth rate of 24% (2012-2023) in the trading volume. In 2023 total volume across all products averaged about 8,000 tons per day, with urea contracts accounting for about 80% of the volume. As mentioned above, urea is the largest fertilizer market traded globally.

Growing liquidity in CME Group fertilizer contracts

APAC is a vital factor impacting both the demand and supply side of the global fertilizer markets. Fertilizer markets have shown increased volatilities in the recent years. The constant changes in prices as well as differentials between different locations and products also post additional risk management challenge to firms involved in fertilizer supply chain from fertilizer producers, distributors to end consumers. The cash settled contracts on CME Group provide an effective way to take positions in the various fertilizer markets without physical delivery risk. Market participants in APAC may find the suite of derivatives product CME Group offers a useful tool for managing overall fertilizer price exposures and various basis risks.   – Source: cmegroup