According to a new Rabobank report, plans to increase fertilizer production in Brazil will not eliminate the country’s fertilizer imports. Instead, it is opening a new window of opportunity for retailers.

“Brazil’s efforts to increase fertilizer production will lower the gap between domestic supply and demand,” says Rabobank Food & Agribusiness Research and Advisory (FAR) Farm Inputs Analyst Erin FitzPatrick. “However, demand growth will outpace domestic supply growth, keeping the country dependent on fertilizer imports, which could continue to leave Brazilian famers exposed to price volatility.”

Some of this volatility will be eased as companies around the globe – not just in Brazil – work to increase fertilizer supply. According to International Fertilizer Association data in the report “Changes in Brazil’s Fertilizer Industry,” between 2010 and 2014, global potash capacity is expected to increase 11.4 million tons, and global capacity of phosphoric acid, the intermediary for phosphate fertilizers, is expected to grow 7.9 million tons.

“The resulting increase in supply will ease price volatility experienced in 2008 and thus the volatility farmers experience,” says FitzPatrick, who co-authored the report with FAR Brazil-based Fertilizer Analyst Priscila Richetti. “However, it does not install a mechanism to remove future price volatility from the Brazilian fertilizer industry.”

As part of a Brazilian government $880 billion program focused on infrastructure investments to boost economic and social development, $6.2 billion is slated for the fertilizer industry. Specifics of how the money will be disbursed were not disclosed, but the government is likely to focus on private sector deployment, in contrast with prior announcements that privately owned reserves could be nationalized.

“In the fertilizer industry, this means government threats to set up a fertilizer company will likely remain just that,” says Richetti. “Instead the focus will be on leveraging existing assets, infrastructure and knowledge of Brazilian fertilizer and mining companies.”

Brazil’s economic reserves of phosphate rock and potash place them sixth and fifth in the world, respectively. Phosphate rock reserves are sufficient to meet the country’s demand through capacity expansions. Potash reserves, on the other hand, can be further developed in Brazil, but will not be enough to meet long-term demand in the country.

Plans to develop phosphate rock reserves could potentially double production to 12.4 million tons in 2015 – up from 6.6 million today. At least half of this expansion will come from phosphate reserves controlled by Vale (a Brazilian company that is now the country’s biggest phosphate rock producer). This could decrease Brazil’s phosphate imports to 20% of demand.

For potash, capacity production in Brazil could nearly triple in the next five years. This increase – from today’s 493,000 tons to nearly 1.2 million tons – will come from the country’s only potash producer, Vale, which has stated its desire to become a global leader in potash production. Additionally, Vale’s expansions in Argentina and Canada could be considered an extension of Brazil’s control over global potash production.

“Planned domestic expansion could lower Brazil’s share of imported potash and phosphate fertilizers in the short term,” says FitzPatrick. “However, because Brazil’s demand for phosphate and potash fertilizers is two to four times the amount of domestic supplies, the country will remain dependent on imports.”

Brazil’s increase in fertilizer production comes mainly from Vale, which is putting production in the hands of fewer companies and represents a change in Brazil’s fertilizer chain. This leaves less integration between upstream and downstream players in the value chain causing retailers to seek new strategies.

“This opens the door for new market entrants at the retail level in Brazil, which could interest international or regional companies,” says Richetti.

Background
With agriculture representing 25% of Brazil’s gross domestic product (GDP), and as home to 13% of the world’s untapped arable land, that percentage is likely to grow. As it does, so does the need for fertilizer.

However, Brazil’s strong demand growth for fertilizer has rapidly outpaced its domestic supplies, creating an increasing reliance on imports. Today, more than 70% of Brazil’s fertilizer use is imported – making it the world’s second-largest importer of phosphate and potash fertilizers. Because of this, Brazilian farmers have been increasingly exposed to international price volatility.

So, in early 2010, the Brazilian government announced new incentives to encourage the expansion of its domestic fertilizer industry. The incentives, which will be disbursed over four years, are designed to encourage growth in the country’s domestic fertilizer production.