Searching For Stability
After last year's wild ride, the fertilizer industry adjusts to life with continued volatility.
March 5, 2009
Experiences of the past year have emphasized some important trends which impact everyone in the supply chain — from the fertilizer producer down through the distributor, dealer, and grower. The business has truly become more global; its success in the future depends largely on developing more efficient distribution, and effective buying and risk management strategies now need to adapt to the more volatile times.
If events of the past year have taught us anything, it's that global access in today's fertilizer business is essential. CHS is working to maximize its global grain marketing infrastructure and grow its global sourcing capabilities to build an information network for both the input and output sides of agriculture. We're pursuing this approach because the two sides of the business have become closely intertwined, giving us unique insights we can use to help our customers be more competitive.
The shift in where products are produced in recent years has greatly impacted how and when we buy. Today, 66% of the urea, 20% to 25% of the UAN, and much of the ammonia U.S. growers use is imported. The result is that over half of total U.S. nitrogen used by growers is now imported. Due to the relatively high U.S. cost of natural gas — the main ingredient in ammonia — we will continue to see new nitrogen production built in the Arab Gulf and other gas-rich regions.
Phosphate and potash supplies produced in North AmerÂica still dominate those markets, and that's not likely to change in the near future. The only significant import of either of these is potash from Russia, which makes up less than 10% of the market.
Our current challenge with product supply stems from lack of demand, which has been caused in part by the current global credit crisis. It has led to the shutdown of a significant portion of nitrogen, phosphate, and potash production capacity in recent months, so the industry currently doesn't have enough production up and running to meet all seasonal demand. That could cause tightness in some markets through the spring season this year.
Adequate infrastructure is crucial to most businesses, but now we live or die by it in the crop nutrient industry. You base inventory management on your storage capacity and ability to move product where it's needed. The U.S. crop nutrient distribution system has, for the most part, sufficient storage to cover demands for each season — spring and fall. Much of the new capacity that's being added will provide increased logistical and transportation efficiencies. For CHS, a recent example is a new facility in Friona, TX. When completed later this spring, the new warehouse will provide storage, blending, and rail loadout capabilities to better serve our customers throughout Texas, Oklahoma, New Mexico, and parts of southern Kansas and Colorado. We'll gain transportation efficiencies because it has been built near our existing grain handling facilities.
We'll continue to see consolidation of older assets to take advantage of unit train efficiencies and other ways to remove cost from the system. We've already seen quite a few new hub plants built for the same reason and expect to see more pop up in the next few years. The key here is that dealers and distributors must ensure real cost savings are achieved with new facilities and that the added risk of big one-time fertilizer buys can be managed.
While last year's price run-ups were a historic anomaly, something similar could happen again. Hopefully the industry will be better able to react, and react sooner, if it does. To do that, it is important to track key market factors, such as relative world natural gas prices, commodity prices, and projected food demand. They can provide some insights into future supply and demand issues.
But for the dealer and grower, it is critical to develop a buying strategy. Trying to call the bottom of the market is much too risky in today's volatile conditions. Start by committing a general plan to paper that outlines product volumes needed, based on historic averages.
Then, look at ways to spread out purchases, buying in 1,000-ton increments, if necessary, to even out the effects of price swings. Everyone wants to hit a home run and buy all their product at the lowest price, but that's just not feasible in today's markets. Markets move much more quickly than they used to, so making more, smaller purchases is a good way to help reduce price risk.
Many cooperatives now limit their unsold inventory, replacing it only when they make sales. Making those sales also depends on good, regular communication with customers. While this spring has been a particularly challenging time to get commitments on crop nutrients, it's important to keep open those lines of communications with customers and use them frequently. You need to be able to react as quickly as you can to secure product for your customers when they make decisions.
Fertilizer prepayment has become widespread and is a policy that is likely to stay. There's simply too much risk involved for any business to continue to extend credit beyond 15 to 30 days, unless it's through some structured in-house credit plan.
For growers, the real key is to market their crops to the best of their abilities, and not become too anxious over input purchases. By layering product purchases and backing those purchases with grain sales, they can lock in margins, greatly reducing risk. And growers can generate more income through timely marketing of outputs than they could ever save through the most astute fertilizer buying.
Chrislip is director, crop nutrients product management and business development for CHS Inc.