By Rod Nickel
WINNIPEG, Manitoba, Dec 19 (Reuters) - Phosphate fertilizer producers, including Mosaic Co and Potash Corp of Saskatchewan, are paying the highest prices in two years for sulphur, a key ingredient in their farm products, but farmers are the ones absorbing the extra cost.
Higher sulphur costs, the result of tight global supplies and strong Chinese demand, come as fertilizer makers struggle against a crop price slump that has diminished farmer buying power and as new global phosphate supplies come on stream.
The spike in thinly traded sulphur caused "a bit of pandemonium," as it is a byproduct of oil and gas output, making it difficult to fill shortages quickly, said Andy Jung, director of market and strategic analysis at Minnesota-based Mosaic.
Mosaic and Potash, among others, convert bright-yellow sulphur into sulphuric acid to make diammonium phosphate (DAP), a widely used phosphorus fertilizer.
While crucial for fertilizer, sulphur is a small, niche product for energy producers that they remove from oil to prevent acid rain-causing emissions. Potential beneficiaries of higher sulphur prices include producers Teck Resources , which declined to comment, and Suncor Energy , which did not respond.
Mosaic and Potash are paying $110 per tonne for sulphur this quarter, up $36 from last quarter, BMO analyst Joel Jackson said.
In response, fertilizer companies have increased DAP prices. It sold at Tampa, Florida for an average $385 per tonne last week, up 21 percent year over year, according to Mosaic.
Potash declined comment.
Higher fertilizer costs come as North American farmers are already financially stressed.
"If they get too high, guys will just cut back," said Todd Lewis, president of Agricultural Producers Association of Saskatchewan.
In the past two weeks, Chinese sulphur prices have declined rapidly from their highs in typically volatile fashion, offering some relief, Jung said. Even so, Jackson expects contract sulphur prices in the first quarter of 2018 to exceed fourth-quarter prices.
Despite high prices, some sulphur producers hold large stockpiles.
About 10 million tonnes of sulphur sit at Syncrude's oil production site in northern Alberta, big enough to be visible from space, said a sulphur industry official not authorized to speak publicly.
Moving it is an expensive, time-consuming process, requiring sustained high prices, the source said.
Syncrude spokesman Will Gibson said sulphur marketing decisions are up to its joint venture owners.
One of the owners, Imperial Oil, declined to comment.
For sulphur producer Canadian Natural Resources, an Alberta-based oil and gas company, revenue from the substance represents only a small share of its portfolio, spokeswoman Julie Woo said. (Reporting by Rod Nickel in Winnipeg, Manitoba)