Unraveling the Dynamics of the Global Fertilizer Market

Potential Drivers of Demand Swings

Historically, the growth in the fertilizer market has been driven by the continuous increase in global application rates to meet the expanding demand for crops. Farmers view fertilizers as essential for achieving high yields, with those in the US, EU, and Brazil allocating 25 to 40 percent of their annual budgets to fertilizers. Steady population growth and improving calories per capita are expected to sustain future growth. However, several potential disruptors could lead to significant changes in projected 2040 volume demand.

Precision agriculture, using data analytics and various sensors, has the potential to reduce overall fertilizer volumes by up to 5 percent. Currently, 20 to 30 percent of global farmers have adopted precision agriculture hardware, and an additional 5 percent are expected to do so in the next two years. This technology optimizes fertilizer application, ensuring crops receive the right nutrients at the right time and place.

Accelerated Adoption of Next-Gen Inputs

Next-gen inputs like biostimulants have the potential to offset commodity fertilizer usage. These include nitrogen-fixing biologicals, beneficial bacteria and fungi, and seaweed extracts. Approximately 20 percent of global farmers have already adopted biostimulants, and 6 percent more are expected to do so in the next two years. In the US, nitrogen-fixing biologicals are the most commonly adopted. If farmers replace commodity fertilizers with biostimulants, it could lead to a 5 to 10 percent decrease in 2040 volumes.

Biostimulants increase nutrient availability to crops, aiming for higher yields and lower environmental costs. They also reduce emissions compared to nitrogen fertilizers as they don't require ammonia production and have lower on-farm emissions profiles.

Rising Regulation in Agriculture

Agriculture contributes about 15 percent to global emissions, with nitrogen fertilizers accounting for 3 percent. Around the world, there is a growing focus on environmental sustainability and reducing greenhouse gas emissions. For example, the EU Green Deal sets targets for reducing fertilizer use. Industry players, including CPG companies, are setting Scope 3 emission targets. Enhanced regulations could lead to a 5 percent decrease in 2040 volumes.

Such commitments from CPG companies can have a cascading effect on farmers. Even without government regulation, there is a push towards more sustainable agricultural practices.

Increasing Application Rates in Africa

As African farmers gain better access to fertilizers and other agricultural inputs, there is an opportunity for application rates to grow closer to global averages. Currently, the average combined application rate in Africa is about 120 kilograms per hectare, compared to 135 kg globally. If African farmers increase their application rates, it could lead to a 5 percent increase in global fertilizer volumes by 2040.

This growth in Africa could have a significant impact on the global fertilizer market as the continent's potential for agricultural expansion is substantial.

Declining Application Rates in China and India

China and India have historically applied more fertilizers than the rest of the world due to factors like small shareholder farmers and subsidies. However, they are now taking steps to reduce overuse. For example, China's 2015 Five Year Plan has successfully reduced fertilizer consumption by about 12 percent. If they move to reduce application rates to global averages, it could lead to a 5 to 10 percent decrease in 2040 volumes.

This shift in application rates in these major economies could have a profound impact on the global fertilizer market and force industry players to adapt.

Increasing Soil Degradation

Soil degradation caused by aridity, salinization, erosion, and other factors can disrupt the efficiency of nutrient delivery to crops and put downward pressure on yields. In some cases, farmers may need to apply more nutrients to maintain yields, increasing fertilizer demand by more than 10 percent. But in other cases, soil degradation could reduce overall yield potential, making it unprofitable for farmers to apply additional fertilizers.

Understanding these different scenarios is crucial for the fertilizer industry to prepare for the future.

Shifting Land Use

As global demand for food, livestock, and fuel grows, and global temperatures shift weather patterns, land use is expected to change. This could lead to a projected decline in overall fertilizer volumes. Diet shifts away from animal proteins and increased demand for biofuels could impact fertilizer demand.

These changes in land use pose significant challenges and opportunities for the fertilizer industry.

Potential Drivers of Supply Swings

In addition to demand disruptions, the fertilizer market will be shaped by several critical supply-side drivers. These include increased raw material volatility, shifting global supply chains, especially with the rise of blue and green ammonia production, increased sustainability pressures on manufacturers, shifting geopolitics affecting global trade, and an increased push towards self-sufficiency in some regions.

These trends will intensify global competition and make it crucial for industry players to position themselves on the cost curve to protect margins.

Strategic Considerations for Industry Players

Given the potential for significant demand swings, crop nutrition leaders should consider several questions to position their businesses for the changing world. How can they protect their position on the cost curve, especially those on the right side? How can potential demand shortfalls affect plans to build incremental capacity?

Innovation in product and service portfolios is also crucial. How can players offer agronomic services by partnering with precision agriculture players? How can they enhance their go-to-market strategy with data and analytics in growing markets like Africa?

Investing in sustainability is essential to protect profits in a regulation- and sustainability-conscious future. How will soil health play a role in this? And how can players optimize procurement in a world of changing inputs and shifting geopolitics?