A Fertilizer Flurry
September 8, 2008 By all early indications, 2007 may be the year fertilizer retailers, distributors, and producers have been dreaming of since the 21st century began. If the market analysts are correct, it will be an extremely memorable (and profitable) year for everyone involved in the fertilizer trade — thanks in large part to corn.
Truthfully, fertilizer hasn’t been exactly suffering recently. According to data collected in the annual CropLife® 100 retailers survey, fertilizer sales increased 3.5% during 2006 to $5.9 billion. This led all crop inputs with a 44% share of total market sales.
Despite this growth, retailers in 2006 noted there was significant push back from grower-customers on many fertilizer types as prices remained high and commodity prices stayed low. “There was increased shopping around for the best price, a reluctance to build inventories because of price uncertainty, and an all-around cash flow strain,” said one retailer. This situation was further complicated by a drop in planted corn acreage — historically one of the most fertilizer-dependent crops — down from 81.6 million acres in 2005 to 79.4 million acres in 2006.
All this is poised to change in 2007, however. According to statistics from USDA, corn acreage is projected to rebound to 83 million acres this year, an increase of 4.5% compared with the 2006 total. Almost all of this growth is tied directly to the anticipated demand for corn from ethanol producers, which has already pushed the per-bushel price of corn to more than $3.30. At present, approximately 15% of the U.S. corn crop is used to make ethanol, but this percentage is expected to climb significantly as more ethanol plants come onstream.According to David Delaney, president of PCS Sales, this will translate into a completely different fertilizer picture. “Because of low corn and wheat prices and high energy input costs, U.S. growers have been drawing down soil nutrient levels without replacing those nutrients,” says Delaney. “That appears about to change as corn and wheat futures — key drivers of fertilizer use — are much stronger than they were several months ago. USDA has slashed its corn ending stocks estimate from 2.2 billion bushels for the 2005-06 crop year to 1.1 billion bushels for the 2006-07 year, reflecting growth in ethanol production that is much stronger than expected, plus increasing export demand.”
Based upon this data, Estelle Grasset, public affairs specialist for The Fertilizer Institute, speculates 2007 will be an exceptional year for fertilizer. “Using recent application rate data, an additional 1 million acres planted of corn would require 65,000 nutrient tons of nitrogen, 23,000 nutrient tons of phosphate, and 27,000 nutrient tons of potash,” says Grasset.
N-Chanted Growth
Looking at the individual macronutrient segments, nitrogen-based fertilizers stand to benefit the most from the increased corn crop. According to Jeff Holzman, an analyst in the business development and strategy group for Agrium, the high water mark for nitrogen (N) usage recently was 2004, when 12.7 million short tons were applied. Since that time, however, demand has been dropping. “U.S. nitrogen demand declined over the past two years due to high input costs and relatively low grain prices,” said Holzman, speaking at the 2007 Fertilizer Outlook and Technology Conference. As a result, the final usage number for N in 2006 was 11.7 million short tons.
As with N, phosphate (P) also had its best consumption occur in 2004. According to Corey Giasson, manager of market research for Potash Corp. of Saskatchewan Inc. (PotashCorp), P usage in that year was 4.8 million metric tons. But since then, consumption has fallen — down 4% in 2005 to 4.6 million metric tons and 11% in 2006 to 4.1 million metric tons. “This decline was due to continued weakness in commodity prices, higher energy input costs, and uncertainty about planting decisions,” said Giasson.
In 2007, P consumption is projected to follow the same curve as N. Total usage should increase 11% to 4.6 million metric tons. “This will be due to higher grain prices, an increase in corn acres, and the need to replace soil nutrients,” he said.
Potash Recovery
As for the outlook for potash (K), Michael Rahm, vice president of market & economic analysis for The Mosaic Co., believes it should also improve following a difficult 2006. “We estimate that U.S. potash use dropped 9% to 10% last year due to the shift from corn to soybeans and a decline in application rates,” said Rahm. “A major de-stocking of a full domestic distribution pipeline accounted for the rest of the decline in shipments in 2005-06. North American potash shipments declined 22% to just 5.6 million tons. That was the lowest domestic volume since 1982-83, when a special payment-in-kind program unexpectedly pulled an additional 49 million acres out of production on top of the 29 million already idled as a result of U.S. farm programs.”
Luckily, this K hangover won’t last. “We forecast that U.S. potash will rebound 7% to 8% in 2006-07 as result of a large increase in projected corn acreage and a partial recovery in application rates,” he said. “As a result, North American shipments are projected to increase 22% to 6.8 million tons of K in 2006-07.”
In the short term, added Rahm, 2007 could be just the beginning of some incredibly profitable years for U.S. agriculture. “U.S. corn stocks are projected to fall not as a result of a supply shock but rather due to impressive growth in corn use during the last few years,” he said. “Increases in ethanol production have accounted for most of the recent growth in U.S. corn use and projected exponential increases in ethanol production are expected to fuel even larger increases in domestic corn use during the next few years.”
Ever Upward
According to USDA long-range projections, corn acreage should continue to climb through the end of the decade. By 2010, there might be 87.5 million acres of corn being planted in the country, an increase of 5.4% from today’s mark. Despite this fact, analysts predict that this boost in acreage still won’t be enough to cover demand as ethanol expands. Consequently, said Rahm, corn prices will continue to improve.
“The new crop price of corn today is more than $1 per bushel higher than a year ago and that difference looks like it will continue to widen,” he said.
Besides tracking corn prices and ethanol growth, 2007 also marks the end of the current Farm Bill. According to PCS’ Delaney, there is expected to be extensive debate over many aspects of the bill, including the size of the U.S. budget deficit, farm safety nets, and the environment. This makes it unlikely a new Farm Bill will be in place for the start of 2007-08, so growers will use the current bill for fall fertilizer decisions.
“While the structure of the next Farm Bill is presently unclear, soaring corn demand for ethanol production and tightness in world supplies of most crops suggest that rising crop prices may reduce the bill’s importance,” he says.
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