Fall Fertilizer Outlook: A Heated Debate

Now that the calendar has turned to September, many ag retailers are gearing up for the usually busy fall fertilizer application season. However, because of the extended drought that gripped much of the Midwest during the summer, there are a fair number of applicators that fear the 2012 fall season will be a non-starter for them.

To appreciate just how deeply this sense of apprehension about 2012 is running, consider this tale from Tim McArdle, COO/vice president for Brandt Consolidated Inc., Springfield, IL. This past July, McArdle was in attendance at the Southwestern Fertilizer Conference, an annual gathering of top fertilizer suppliers and distributors. Normally, this event is dominated by discussion of fertilizer market trends and the finalizing of distribution deals.

This year, however, most of the talk concerned the weather.

“I’m sitting in the San Antonio airport to return from the meeting,” wrote McArdle in a mid-July email. “The drought and its impact was the major discussion point here.”

But will the prospects for 2012 be that bad? Before attempting to answer this question, a brief review of how events have played out during 2012 is in order.

At the beginning of the year, grower-customers were still feeling pretty good. According to USDA, corn acreage was expected to top 96.4 million acres — the largest seeded area figure the U.S. had seen in 75 years. Projections for broad fertilizer usage was also high. An early, dry spring helped growers get virtually all of their seed planted by the end of May, furthering rising hopes for a good 2012 corn season.

How Dry We Are

Unfortunately, the dry spring never really came to an end. Then, a series of slow moving or stationary high pressure systems kept much of the nation’s midsection baking throughout the key corn growing months of June and July. By early August, USDA had designated 1,585 counties in 32 states as disaster areas because of the lack of rainfall. Particularly hard hit were key corn producing states such as Illinois, Iowa and Indiana. But nationwide, USDA rated approximately half of the corn crop as very poor to poor.

From the field, the news supported this analysis. “The crops in Central Illinois are hurt badly,” says McArdle. “The average yield will, at best, be one-half, with many fields in the 0- to 50-bushel range.”

As a result of this, USDA has slashed its harvest projections for corn to 86.4 million acres with yields off 23% from 2011 to 128 bushels per acre.

Still, there are some areas where the drought’s impact appears to be less severe. For example, Ohio corn growers have fared much better than their counterparts in neighboring states. “The full impact [of the drought] is very difficult to predict as some parts of our trade area have experienced severe crop loss while others have had much less,” says Doug Busdeker, senior manager, Northern farm centers for The Andersons Inc., Maumee, OH.

But even with significant crop losses caused of the drought, adds Busdeker, many grower-customers should be protected from complete financial disaster because of their crop insurance policies. However, as Brandt’s McArdle points out, fall cash flow for some growers could be an issue “since crop insurance payments will not come until later.”

The Fall Outlook

So how will this chain of extraordinary events impact the outlook for fall fertilizer? “Well, I think that’s the big question,” says Bill Coen, vice president, plant foods/transportation for MFA Inc., Columbia, MO. “I think everybody’s wondering how the drought will affect fertilization and purchasing habits going into the fall.”

And? “We don’t know the answer to that just yet,” says Coen. “Our guess is, from some of the conversations we’ve had with some of our customers that they’ll kind of wait and see what crops they have, process their insurance claims and then kind of make a decision on what they will do for fertility.”

However, other ag retailers are a bit more pessimistic about the outlook for fall 2012, especially for crop nutrients such as potash (with corn accounting for approximately 45% of annual U.S. usage, according to sources). “Our business will see a reduction of fertilizer sales this fall — up to has much as a 50% reduction,” says Brandt’s McArdle. “Nitrogen should be okay, but it still requires rain before it can be applied.”

Still, ag retailers aren’t completely trying to get a read on fall 2012 without the ability to rely on some historical assistance. In many quarters, market watchers have compared the Drought of 2012 to the last major drought that gripped U.S. agriculture back in 1988. According to USDA statistics, U.S. corn yields in 1988 were off 30% from the previous year to 84.6 bushels per acre — very similar to the 23% loss projected for the 2012 crop.

Despite this drop, however (or because of it), U.S. corn growers moved forward with their 1989 planting intentions with a sense of normalcy — at least when it came to nitrogen fertilizers. According to USDA statistics, corn growers used just shy of 4.5 million tons of nitrogen products during the drought year of 1988. In 1989, they used more than 4.6 million tons of nitrogen fertilizer, an increase of 2.3%.

Looking ahead to fall 2012 and spring 2013, it makes sense that a similar pattern will emerge for nitrogen-based fertilizers, say market watchers, pointing out that corn’s response to nitrogen is usually less during a drier year. “The bottom line is there will be big corn acres again next year and these guys will not shortchange a crop,” says MFA’s Coen. “They want to maximize their yields, so they won’t cut fertilizer to the point that it’s detrimental.”

However, the historical tale of 1988-89 is a bit less positive for the other two macronutrients, phosphate and potash. Perhaps possessing a mindset to “mine” their soils, U.S. corn growers applied just short of 1.8 million tons of phosphate in 1989, down 3.1% from 1988’s total. Potash application took a similar hit, down from 2.5 million tons in 1988 to 2.2 million tons in 1989.

So if history repeats itself in 2012, nitrogen fertilizer applications should trend slightly higher during this year’s fall season while phosphate and potash application would suffer some setbacks. But some ag retailers don’t think this will happen, especially given that plant roots need to grow where phosphate and potash are located in the soil and 2012’s severely dry summer will have likely moved these nutrients further down into the ground.

“They’re just smarter than that,” says Coen about his grower-customers. “They’re good operators and they watch their fertility, so I’m hopeful that we’ll have some good movement in the fall. I don’t think fertilizer will be cut back as much as people think it will be.”

Part of the reason for this optimism for 2012 could relate back to good-old-fashioned money. Back in 1988, the crop losses translated not only into lower yields but fertilizer prices as well. According to USDA statistics, nitrogen fertilizer prices dropped an average of 6% per ton between October 1988 and October 1989. Likewise, the price for potash per ton fell 2.6% while phosphate prices dipped 9.5%.

At the start of the year, fertilizer market analysts were predicting double-digit price increases for the three macronutrients for the 2012 season, buoyed by robust commodity prices and grower income. Nitrogen fertilizers were expected to be approximately 20% on average, with phosphate and potash both increasing in price by 38% apiece. Chances are, say market insiders, these kinds of across-the-board fertilizer increases might not come to pass.

Barge Trouble

Then again, fertilizer prices could end up higher this fall. However, the culprit won’t be tied to all-time record highs for commodity prices or higher planting intentions for spring 2013. The problem, says Coen, could be transportation.

“I think the bigger issue this fall is going to be our river system and getting products moved where we need them in a timely fashion — especially if this crop is early, which it looks like it will be,” he says. “I think we may see fertilizer movement start a little early, but the river system is such that we’ve got a lot of ports that cannot unload barges right now.”

The facts support this assessment. According to the U.S. Army Corps of Engineers, the Drought of 2012 has reduced water levels on important transport routes such as the Mississippi River that nine barges have run aground since the beginning of July. Every 1-inch loss of water decreases the carrying capacity of a barge by 17 tons of cargo, says the American Waterways Operators.

In essence, this reduces the number of barges that can be moved in tandem on the river by 10 or so, say experts, and the carrying loads from 2,200 tons per barge to 1,600 tons per barge.

“I think we can still get barges up the river, but there are a lot of docks that are too low for barges to be unloaded,” says Coen. He adds that fewer barges carrying smaller loads means suppliers will need to have more shipments made to equal their delivery order totals, which could significantly increase transport costs.

While questions still remain about how fall fertilizer applications will pan out in 2012, ag retailers say their grower-customers remain relatively positive in their outlooks for the future.

“Where the drought was most severe, growers will likely be more cautious, but will still prepare for next year’s crop,” says The Andersons’ Busdeker. “Considering the demand for corn overall, we expect the season to still be reasonably good.”

Brandt’s McArdle agrees. “We corn prices where they are, we are optimistic about 2013,” he says.

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