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Possible potash demand downside lies in U.S.-China trade war resolution

➤ Resolution of the U.S.-China trade war could temporarily depress demand for potash, a key fertilizer.

➤ CRU Group's base case sees the trade war continuing, supporting Brazil fertilizer demand.

➤ Brazil's heavy rains drive strong potash use on soybean crops.

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CRU analyst Humphrey Knight
Source: CRU Group

Chinese tariffs on U.S. agricultural products have helped buoy Brazilian production of soybeans, shifting China's imports away from the U.S. In turn, Brazil's booming soybean production has supported strong fertilizer demand. S&P Global Market Intelligence recently caught up with CRU Group fertilizer analyst Humphrey Knight to unpack some of the implications of the U.S.-China trade war. What follows is an edited transcript of the conversation.

S&P Global Market Intelligence: You have noted that Brazilian soybeans tend to rely on more potash than U.S. soybean crops. Why is that?

Humphrey Knight: As a rule of thumb, it's to do with crop rotations. Whatever crop goes in the ground first tends to get the bigger application of fertilizer, in this case potassium chloride [also known as muriate of potash, or MOP, and potash]. In Brazil, that is typically soybeans, which usually gets the bigger hit. In the U.S., corn generally goes in first, and that gets a bigger hit.

Right. And in Brazil, more intense fertilizer use may be required for newly opened ground, whereas the U.S. agricultural sector is more mature.

Exactly. The reason the Brazilian soybean fertilizer application rates get quite distorted quite a lot higher than the U.S. is because of the continued area expansion of soybeans in Brazil. That's been the case for the past five or six years, and with the trade dispute at the moment, that encourages it to continue. In part, the elevated application rate in Brazil just has to do with extremely high rainfall, which makes the soils very potassium poor.

The rain leaches it out.

Yes. And they require a big application of potassium early on. So when you have crop expansion like Brazil's in recent years, it inflates application even further than it otherwise would be.

When you look to 2020, do you expect U.S.-China trade issues to have an impact on fertilizer demand?

It's very unpredictable. But in our base case, we are expecting the dispute to continue at least for the next 12 months or until the next presidential election. What that means is the situation we have now remains much the same. That essentially means Brazilian demand for MOP continues. Even though MOP prices relative to soybean prices are not great at the moment what we call affordability it doesn't really matter if you're a Brazilian farmer. Fertilizers are a small part of their budget overall. And in the U.S., it is hypothetically not all bad news for MOP because higher corn plantings, spurred by China's tariffs on U.S. soybeans, in theory induces slightly higher MOP demand.

But it's difficult to see how it's going to play out because there's also indications of increasing soybean plantings in the U.S. next year in anticipation of some sort of trade resolution.

Is that a question of how farmers choose which crops to plant amid the uncertainty?

Some producers are saying soybean area in the U.S. may go up next year. I'm not totally convinced. It's possible. We expect MOP application to increase in the U.S. next year, not because of the trade war but because this year was such a mess following the wet, wet weather in spring.

Would you expect potash demand to fall if the U.S. and China resolve their trade war and China ends its tariff on U.S. soybeans?

It does represent downside overall. In terms of the U.S., it would probably be a net zero effect because lower soybean area this year has had an impact on MOP demand in the U.S. But the impact on Brazil would be pretty big. To give you an idea, if you look at soybean exports from Brazil to China in recent years, they have rocketed from around 30 million tonnes to double that. And that requires substantial amounts of extra fertilizer to keep yields at that level.

If we see those numbers return to historically lower levels, we expect the market would have jolt in demand for MOP in Brazil. But while it's the biggest MOP import market, it's not the only one. You could have a knock-on effect with China after a possible trade war resolution. For example, if the yuan appreciates against the dollar, that improves China's importing power.

Not a straightforward equation, in other words.

Exactly.