Fertilizer: Pedal To The Metal
A slow start to spring fertilizer sales, followed by rapid and condensed acceleration, could stretch the limits of just-in-time delivery.
March 11, 2010
Caution, not commitment, is the "c-word" used most often in crop nutrient circles this year, all the way up the supply chain. A slow start to spring buying in many parts of the country has put much of the industry on edge, trying to prepare for what could be another challenging year for fertilizer.
"Everyone is waiting for growers to start buying," says Jeff Greseth, director of supply and trading, Crop Nutrients, for CHS. "With many of those decisions being made later than normal this year, and some products already in tight supply, we'll definitely be pushing the limits of just-in-time delivery this spring."
The just-in-time delivery concept becomes more complicated with urea, since half of the 8 million tons used annually in the United States is imported from outside of North America, says Matt Bohan, international product manager for CHS. "About 2 million tons of urea is imported from the Arab Gulf each year. Vessels sailing from there typically take about 30 days to reach U.S. ports. But recently, in order to avoid the added costs of going through the Suez Canal, as well as the Somalian pirate threat, those vessels are going all the way down around South Africa and up to the U.S., which adds another 10 days to the voyage.
"Then, it takes another five days to discharge the vessel, and 21 to 28 days for the barges to make it up the Mississippi River, so you're now looking at a total of 75 to 80 days from when product is loaded in the Arab Gulf until it arrives at terminals in the Midwest," he says.
Based on this, it takes advanced planning to get vessels to the U.S. in time, he adds. "Someone needs to step in and buy them, but because of the losses taken last year, there is more reluctance to do that this year. This will be felt in the supply chain this spring."
Along with the Arab Gulf, other sources for U.S. urea imports include China, Venezuela, and Trinidad, which supply spot cargos that have totaled around 1 million tons annually in recent years. "That amount is less dependable because spot cargos will only go to the highest priced markets, and over the past eight months, U.S. urea prices have been below world prices," says Bohan. "That's a major reason we are still almost 1 million tons below the usual 12-month rolling average heading into spring."
The latest USDA estimates are for 88 million acres of corn crop to be planted this spring, which is up from the five-year average of 86 million acres, he adds. "With current dealer inventories significantly below last year's levels, plus 2 million more acres of corn and 1 million fewer tons of urea, there is potential for a urea shortage."
With the majority of phosphates, UAN, and ammonia produced domestically, there is less concern about overall supplies, notes Greseth. "Strong international demand and a busy export market has pushed phosphate prices higher in recent months, and now producers say their production could be limited due to sulfur shortages," he says. "But for the most part, supplies should be adequate for spring."
Longer Supply Chain
With more importation of crop nutrients in recent years, the supply chain has gotten stretched out, notes Dan Mack, vice president, transportation and business development, CHS Grain Marketing.
"That impacts the industry's ability to thread the needle of just-in-time product delivery. We're likely to be pushing the limits of the transportation system this spring, if fertilizer buying is delayed much more," he says.
There will likely be several major limitations in moving crop nutrients this spring, he says, including the large volume of product that will need to go through the chain within what could be a relatively short amount of time. "The sheer volume, along with soft track and the potential for spring flooding in areas that have seen heavy snowpack this winter, could also increase the length of time it takes to get product to the end destination. We saw this happen last spring, with flooding and wet conditions. For facilities located on branch lines, railroads may be forced to impose weight limitations for tracks in those conditions and it takes longer than normal to get the necessary amount of product delivered."
Load-out capabilities can be a limiting factor, as well as the railroads' abilities to turn rail equipment quickly. "While most railroads now have good availability of rail cars, they are willing to commit only a portion of that fleet to hauling fertilizer," he says. "They may be the exact same type of car, but we can't assume a railroad will automatically increase their fertilizer fleet by converting more of its grain cars to satisfy a short-term demand increase."
On the upside, the increase in unit train facilities in recent years has helped to increase capacity within the distribution system. "The unit train concept allows dealers to pre-position a large percentage of their annual product needs," says Mack. "What used to be delivered by the railcar or truckload is now being moved in 80- and 100-car trainloads, with up to 40,000-ton capacities."
This year that volume advantage in transportation won't be felt until dealers can get enough grower commitments, says Greseth. "So far this spring, few dealers are willing to lay in much more product than they have sold. With the losses many took last year, that is understandable."
Last year's planting season was stretched farther than most thought possible, and that lengthened the window for fertilizer application a bit. But there is still a lot of fertilizer to be shipped this spring, adds Mack. "That means there will be logistical constraints that could have implications for product supply. My best advice is for dealers to get product in place as soon as they can, but be prepared for some delays."
Risk Management Options
Keeping inventories low has become the main method for managing risk for both fertilizer producers and dealers this year.
"No one wants to get caught with excess inventories again," notes Keith Swanson, CHS Crop Nutrients risk management services. "Most want to end the season empty."
There are a few other strategies a dealer can use to reduce risk on crop nutrient, he says, including using the swaps market to transfer the price risk of their inventory. "But dealers can't access that market on their own. That's why CHS developed a dealer risk management service — to provide access to swaps and offer timely market intelligence to participating dealers."
He says another strategy would be to work with a supplier to take unpriced inventory into dealer storage, if space exists. "It could help dealers get ahead of all the just-in-time buying we expect to see this spring, while shifting price risk upstream. The dealer would be giving up warehouse space and lose the appreciation he could claim on owned product, but it would allow him to have product in place without incurring the price risk."
Dealers should continue to encourage growers to develop a marketing plan that is linked to input purchases, says Swanson. "Farmers need to get into the habit of buying inputs and marketing grain simultaneously. But currently I'd say less than 5% are doing that."
This back-to-back selling/buying is the best way to reduce financial risk, and is something increasingly seen at the dealer level, says Greseth. "It means we're dealing with a lot more small purchases, but with the current level of uncertainty out there about the spring season, it's one of the only ways dealers can do business and still sleep at night."
Zenk is a professional writer for CHS, Inc.