Production costs, energy prices and

world price developments

Fertilizer energy agriculture nexus

DG Agriculture and Rural Development

European Commission World Outlook Conference 2015

Outline

• Some observations/questions • Link between input costs and commodity prices

• Do our models account for this? • How do the input markets work?

• Gas • Fertilizer

• Way forward

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2005 M7

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EU

R/T

Development of international maize and oil prices

Maize (US) Feed maize (Bordeaux) Crude oil, UK Brent

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M1

Development of international wheat and fertiliser prices (EUR/T)

Soft Red Winter Wheat (US) Soft wheat (Rouen)

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Development of pigmeat price compared to feed price (EUR/100kg)

Pig Classe E Wheat

Maize Soybean meal

In the EU 2014 and OECD FAO 2013 baseline

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Soft Wheat CPCI and Producer Price (PP)

CPCI EU-15 CPCI EU-N13 Wheat price EU28 Wheat prices E15 Wheat price NMS

Aglink-Cosimo

Energy markets crude oil

exogenous - specific assumption (yearly, 10 years ahead, one single world price = Brentt) based on EIA (OECD) or IHS-Global insight (AGRI)

natural gas not represented other energy markets/sources not represented

Input costs * fertilizer

World fertiliser price endogenous: function of past fertiliser prices (three lags) , main crops (wheat, rice, oilseeds, coarse grains) past world prices (three lags) and historical crude oil prices (three lags)

seeds endogenous: producer price of the commodity (one lag)

pesticides represented together with other tradable inputs (see below)

(compound) feed endogenous : a feed cost index is calculated from the average protein feed producer price of the same year.

young animals represented together with other tradable inputs (see below)

services represented together with other tradable inputs (see below)

energy use/costs exogenous: energy cost sub index depends only on exogenous variables (world oil price and exchange rate)

other tradable inputs (e.g. machinery, equipment)

exogenous: other tradable costs depends only on exogenous variables (exchange rate to the USD and GDP deflator in the USA)

Heterogeneous energy markets

Gas price linked to fertilizer?

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Natural Gas, Russian Natural Gasborder price in Germany, EUR per MW

Natural Gas, National Balance Point,UK, daily spot, EUR per MWh

AN, Farm Price, UK, bags, EUR/ton

Urea, Farm Price, UK, granular, bags,EUR/ton

Calcium Ammonium Nitrate (27.5% NFarm Price, IE, EUR/Ton

Urea (46%N), Farm Price, IE, EUR/Ton

How does the fertilizer market work?

Demand increase in Asia (since 2002)

Source: CRU Urea market outlook June 2013

Urea cost curve for 2015

Fertilizer market

SA 3%

UREA 19%

AN-CAN 47%

UAN 12%

NPK/NK/NP 13%

OTHER 4%

DAP 2%

EU 27

10 million

tons of N

SA 3%

UREA 56%

AN - CAN 8%

UAN 5%

NPK/NK/NP 8%

Other N straight 8%

DAP 8%

NH3 direct application

4%

EU is a nitrates market while the world is a Urea one

World

100 million

tons of N

Source: the Market by ICIS (Mayer Brown)

Top-4 FIRMS generally control more than half of EACH Major COUNTRY production capacity

Note: Based on capacity of operative plants in 2008-09 according to IFDC Worldwide Fertilizer Capacity Listings by Plant.

Important policy interference • China zero growth policy might make china a main exporter • EU decoupling subsidies

Price and policy effects affect agricultural use

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2%

4%

6%

8%

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14%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Share of fertilizer in ouput

EU NL FR DE

Way forward

• Check trend input costs with output prices

• Better represent different energy and fertilizer markets and shares

• Workshop on 23/6 organised by IPTS on the representation of input costs in the different models used at the EC