Fertilizer Market Volatility: The Elephant In The Room
All ag retailers agree — how the fertilizer marketplace performs in the years to come will determine how the whole of the marketplace performs.
November 17, 2010
For the second time in three years, retailers are on pins and needles over the state of the fertilizer market, as the usually gentle swing of the market pendulum took a violent swing from bloated, expensive oversupply in 2008 to nail-biting undersupply in the U.S. market in 2010.
This year, it was a perfect storm of historically ideal harvest weather, high crop prices, globalization in agriculture and sensible risk aversion that has left many retailers with the precise opposite problem this fall and winter as existed two season ago — not enough fertilizer to go around. Unfortunately, there isn't really a lesson to be learned — retailers once again thought they were doing the right thing, only to wind up disheartened, frustrated and searching for answers.
A Sickening Ride
Flash back to the summer of 2008, when retailers followed the well intentioned advice of industry experts and filled their bins to capacity with expensive fertilizer on the understanding that the high prices were not going down anytime soon. Commodity prices were similarly sky high and few people foresaw what was to come — a quick and colossal crash in the price of both fertilizer and grain that would leave retailers holding thousands of tons of overpriced fertilizer that no grower wanted to buy given the price on the open market.
For most retailers, it was a nightmarish time from post-harvest 2008 through the start of 2009, and the options for carrying forth with business largely unpleasant. Tons of fertilizer could be written down, giving back an unhealthy chunk of 2008's profit. Or retailers could push growers to honor their original commitment, and suffer the slings and arrows of their customers, many of whom failed to sell their crop before the price of grain crashed. And for some businesses, especially smaller cooperatives caught up on the wrong side of the grain market, it meant the end of the line through sale, merger or closure.
Mother Nature also turned against agriculture last fall and winter, delivering moisture and cold that pushed harvests back as much as two months beyond the norm and effectively thwarted fertilizer application season. But mercifully, spring got off to a rapid start and focused retailers and growers on moving forward.
"Last fall we did not get on as much product as we hoped to last year, either anhydrous or dry," recalls Kevin Mainord, sales and marketing director at MRM Ag Services, East Prairie, MO, who's story is fairly typical. "We got froze and snowed out and didn't get a lot of late November and December application. But this spring weather cooperated right away, and April was wide open. We ran like crazy for three or four weeks without weather knocking us out."
Early in the season, 2010 was shaping up to be a "normal year, whatever that means," says Jim Howe of Star of the West Milling, Frankenmuth, MI. "Crop prices had fallen, and it looked like that was going to be the trend, and fertilizer prices had stagnated."
In the midst of a dry summer that no one knew would last the entire season, Larry Arndt, president of MaxYield Cooperative, West Bend, IA, kept a copy of an article from June 22 in his desk to illustrate the volatility in the market. "The article stated that because of low grain prices, farmers would be cutting back and not spending like they should," says Arndt. "Farmers would opt for maintenance of fertility because corn was still not profitable. The overall economy of farming was good, but growers in June were saying, 'let's stay with what we ordered last year, or maybe we could cut that back a little bit.'"
Additional purchases of fertilizer were made during the summer based on these modest indicators. And remembering the lesson of 2008, many retailers opted to stock up at levels closer to their anticipated need rather than filling up the bin.
"When we get to August and we start to make some new fertilizer purchases for the fall, we have no idea that our growers are about to move from average levels of applications to 25% to 50% higher than average," says Arndt. "Farmers had backed phosphate and potash off and were looking to maintain and not build. But now yields are coming in and in October, prices are still good and they want to spend money."
USDA's lowered harvest projections released in September set off a crop price runoff, putting growers in the mindset to buy and build fertility. Normally this would be cause for unbridled celebration, but MaxYield is not alone in having made modest fertilizer commitments for the fall and winter application season.
"It was all good until we got to the point where there was no fertilizer supply out there to replenish our bins," says Arndt. "Now, we have an extremely aggressive client requesting fertilizer at a rate we have never seen before, but now we are waiting for product."
To add to the pressure, dry harvest weather in many locations in the Midwest through the fall meant that growers were done and ready for fall application in record time. "In northwest Iowa, we had an open fall with little rain," says Arndt. "We started harvesting in September and did not stop for more than two or three days. Now the guy is done and the fields are black, we have a potentially huge anhydrous season ahead of us and we are now on allocation. You could have planned for a lot of scenarios, but we've never seen anything like this before nor could we have planned for it."
"The guys I work with on procurement and sales have been in the business for 30 years, and they say they have never seen it this bad," says Devin Mogler, vice president of agronomy operations for Farmers Cooperative Co., Ames, IA. The company says getting additional supply has been a headache. "Trains have been pushed back and trucks backed up," he says. "Rather than send us 65 or 85 car units, we are getting spoon fed four to 10 cars at a time, and sometimes even one." Suppliers had been keeping up so far, but at presstime, Mogler says they were within three to five days of running out based on the amount being applied.
Some Good News
Not all the news is bad. Some retailers did bet on higher consumption and have so far avoided the shortages. "We have been very fortunate up until (early November) all plants were running ," says Mike Moser, vice president of agronomy at Cooperative Plus, Burlington, WI. "The competitors on all sides of us have been out of product for two or three weeks. We have two trains arriving this afternoon with 5,000 tons of potash to haul in here shortly.
"I think we got a little more aggressive and bought a little more than we needed," he continues, "but in the end we still needed product. We looked at potash market and decided there was an opportunity for the price to increase. So fortunately we have potash coming in $80 under market, and that should help to have a pretty good year."
Some won but many are struggling to manage the wild pendulum swings in today's fertilizer market. With no real tools available to manage the risk, it looks like volatility will be the norm for some time to come.
Schrimpf is the Group Editor for the CropLife Media Group at Meister Media Worldwide, with full editorial responsibility for CropLife, CropLife IRON, Cotton Grower and PrecisionAg Special Reports.