This week I was preparing a report on international and local fertiliser pricing for Dairy Australia’s Situation and Outlook report. International prices have been rising over the past 3 months but it has had very little effect on the domestic market. That is attributable to the very strong Australian dollar – it has risen from $US 0.96 at the beginning of December to a peak of $US 1.10 on May 2^nd. In my summary and outlook for future pricing the comment was: “It’s all about the dollar!”. The immediate future and direction of fertiliser pricing in Australia will be strongly linked to the exchange rate.

It’s not an easy thing to get a bead exchange rate forecasts. You would think the banks should be experts at this sort of thing. A quick scan of their forecasts showed one saying “Up, up and away”, with a prognosis of a $US 1.15 exchange rate, and another suggesting the peak would be $US 1.05 and we would trend back to parity with the USD in the second half of this year. It's a mystery really but I'm sure they must be giving unbiased, authoritative, and independent advice.

Apart from exchange rates, the other factor driving fertiliser prices is the general strength of the global economy and demand. Asia is particularly important - because of the population, and because that is where global growth is coming from. World prices hinge on negotiations for the very large Indian import contracts and China has a big part to play both in demand and setting export price levels for products like urea and DAP.

The third issue to watch in fertiliser pricing is the international oil price. This is not only an important barometer of global demand and commodity prices, but there is also a strong correlation between oil price and nitrogen prices (nitrogenous fertilisers are for the most part derived from ammonia which is a by-product of natural gas production). The chart below shows the international price indices for crude oil and urea. They have clearly been in lockstep for more than a decade.

The AUD : USD exchange rate is also shown on this chart and this makes very clear the relationship to commodity indicators.

From an Australian perspective this chart speaks volumes for all of the issues driving fertiliser pricing:

• Strong and rising oil prices are correlated with global economic growth and stronger demand for commodities in general.
• Strong and rising commodity prices provide support to the Australian Dollar value.
• Strength in nitrogen fertiliser prices is correlated with a general strength and demand for the other key components, phosphorous and potassium.

You would be easily forgiven if your conclusion from this chart is that fertiliser prices, and commodities in general, will trend steadily upward from current levels. The historical trend also suggests that this should be offset in Australia by a stronger exchange rate.

The reality is however that the future is in the category of known unknowns. Just to underline this point, 10 minutes after I sent my outlook report off to Dairy Australia, the financial news service broadcast the headline: “Oil plunges in commodities rout”. Oil had dropped overnight to below $US 100 / barrel. It seems that western economies are trending weaker and China and India are acting to rein in inflation – which means applying the brakes to their economies. It was no surprise to see that the Australian dollar followed the trend, falling to a low of $US $1.06 on Friday May 6^th. “Up, up and away?” - well maybe.

This discussion is something of a prelude. Last week we published a chart showing the comparative change in wholemilk powder prices from the differing perspective of the major exporters. Global economic growth, commodity pricing trends and exchange rate issue are very pertinent to dairy but the relationships are much more complex than commodities like fertiliser and oil. In my next blog I will dig deeper and show how changes in the world economic order are reshaping the global dairy industry.