Dec 4, 2008

Global Demand and High Fuel Prices Drive Fertilizer Costs

So what was behind the astronomical fertilizer prices this year?

Was it the world’s leading suppliers of potash conspiring to “fix, raise, maintain and stabilize the price at which potash was sold in the United States,” as alleged by a federal lawsuit filed in September in the U.S. District Court in Minneapolis? Or, was it increasing domestic and global demand, high fuel prices and a weak U.S. dollar?

A handful of industry experts said the latter reasons were the cause.

Fertilizer prices were 121 percent higher last September than they were in September 2007, according to Kathy Mathers, vice president of public affairs for The Fertilizer Institute, which represents the fertilizer industry’s interests in Washington, D.C.

Mathers said a number of factors contributed to the price spikes of the last year or two, the main factor being a sharp increase in global demand. Between 2001 and 2006, world demand for the three main ingredients used to make fertilizer – nitrogen, phosphate and potash – grew by 11 percent, 13 percent and 17 percent, respectively. It was the equivalent of a new U.S. market. Most of the new demand came from China, India and Brazil, she said.

Global demand increased faster than the industry’s ability to supply it, said Darryl Warncke, professor of soil fertility at Michigan State University.

“The infrastructure for increasing supply has not been there,” Warncke said. “The profit margin in fertilizers hasn’t been that great.”

Between 1999 and 2005, the United States lost about 26 nitrogen fertilizer plants – roughly 40 percent of the country’s production capacity, according to Mathers.

As a result, the United States is increasingly more dependent on imported nitrogen fertilizer from Trinidad, Canada, Russia and countries in the Middle East. Imports and their drawbacks (such as taking longer to get to market) have changed the supply situation in the United States, she said.

“The dynamic has changed for U.S. farmers.”

Fertilizer companies haven’t been investing much in new production capacity, but they’re definitely considering it now. Expansion will take time, however. Canada’s increased potash production won’t come online until 2010, Warncke said. The United States imports about 90 percent of its potash, most of it from Canada, Mathers said.

Larry Davis, vice president of agribusiness lender KeyBank’s food and ag team in the Midwest, said there has been a significant increase in U.S. corn acres for biofuel in the last couple of years, resulting in more fertilizer on the ground and a smaller overall supply.

“It’s a simple supply and demand equation,” he said. “The capacity isn’t out there to meet demand.”

Rail, truck, barge and other transportation costs for fertilizer were way up this year, thanks to spikes in the price of fuel, Mathers said.

Another major factor is the price of natural gas, the most expensive component in the production of nitrogen fertilizer. When natural gas prices go up, fertilizer follows.

The decline of the U.S. dollar versus other currencies also contributed to the price spikes. A Canadian producer selling fertilizer at $100 per ton in U.S. currency has to charge more when the value of the U.S. dollar falls, Mathers said.

Future prices

No one can really predict which way fertilizer prices will go in the near future. It all depends, again, on the price of fuel (which has gone down in the last few months) and global supply and demand.

“At this point, the crystal ball is a little cloudy,” Warncke said.

Recent trends, however, indicate that prices might be going down, or at least stabilizing.

KeyBank’s Davis said fertilizer prices peaked in July. Since then, phosphate and potash prices have gone down, and might be even lower by spring. The price of nitrogen, used in large quantities to fertilize corn, has remained high, but might go down if corn acres continue their recent decline. He expects supply and demand to even out by next spring or summer – though crops will already be in the ground by then.

Generally, KeyBank’s advice to growers is to buy fertilizer ahead of time, when it’s usually cheaper. However, growers who bought product last summer in anticipation of the 2009 crop might have hurt themselves by locking in those high prices. It might have been cheaper if they had waited, Davis said.

“Good planning might have turned out to be not so good.”

He still considers locking in income and expenses before planting a solid option, but growers might want to explore different options after the events of 2008.