Fertilizer: Uneven Recovery

Many in agriculture, from the relative newcomer to the jaded “seen it all” expert, describe the 2008 year in fertilizer using some pretty heady terms:
“Incredible.”
“Unprecedented.”
“Game-changing.”

Thanks to the violent fertilizer price crash last fall that followed on the heels of a massive price run-up through the spring and summer, many retailers bought high on expected shortages — only to be left holding the bag when customers did not follow through on purchases.

Retailers who did not dial into high-priced product made out well, but the clear majority spent the most recent pre-season dealing with angry growers refusing to pay fertilizer prices significantly higher than they were seeing for wholesale product on the Internet.

With the growing season winding down and fall fertilizer time closing in, retailers are taking stock of current market conditions from the supplier to the grower and making plans for the months ahead. By most accounts, any rebound in fertilizer will be measured in steps and not leaps.

Both Sides Of The Market

“Fall sales may improve a little over last year, but not much,” says Richard Warner, President, Warner Fertilizer Co. in Somerset, KY. Warner’s view is actually more optimistic than many dealers, who don’t believe that sales will increase this season at all.

However, some retailers have already seen improvements this season. Kathy Sims, President, Sims Fertilizer & Chemical, Osborne, KS, says: “We saw tremendous growth in the fertilizer segment of our business this year. Our sales were up by more than 100%.” The secret to Sims’ success? “We were very fortunate that we did not stock fertilizer last fall, and that put us in a very competitive position.”

Other retailers were not so lucky, but are still hopeful. Larry Beck, President, Mid-Valley Agricultural Services Inc., Linden, CA, says: “Fertilizer sales were down in 2008 because of the price of potash. Recently the price of potash has dropped, but it needs to come down another 20% to attract increased usage on the West Coast. The price of nitrogen and phosphorus will result in normal usage in 2010.” The high price of potash may impede its sales again this year and next, but growers will be putting on more phosphates and nitrogen.

Potash prices are still a problem for growers and retailers alike. “I feel that the price of potash needs to be adjusted downward even more,” says Verne Johnson, President, Jay-Mar, Inc. of Plover, WI. “Though it has come down in price, it’s still way too high relative to the price of nitrogen and phosphate.”

“Fall sales could be better as grain prices improve,” Warner says. “Crop input costs such as fertilizer, particularly potash, still need to decrease to overcome the bad taste that farmers had as a result of the two prior years’ high prices.”

Grain prices are also having a strong negative effect on fertilizer purchases. Wheat futures fell in early August, bringing down fertilizer demand. Brent W. Sutton, General Manager, Growers Fertilizer of Lake Alfred, FL, says: “Commodity prices need to improve for our customers. Lower cost fertilizer materials may help sales also.”

Whether or not commodity prices go back up, however, growers may not be able to skip adding fertilizer two years in a row. With lower grain prices, growers can’t afford to lose quality or yield as well. Dan Mogged, Vice President of Van Horn Inc., Cerro Gordo, IL, says: “Even with the commodity prices being down, [growers] know they need to replace fertilizer.” Van Horn Inc. has been taking respectable orders for fall: “It looks like they’re significantly increasing because they cut back last year,” Mogged says. “In a lot of cases, they’re putting on what they didn’t put on last year to make up for that.”

Johnson says Jay-Mar “would love to have better fall fertilizer sales, but low grain prices and even lower milk prices are making fall fertilizer application hard to afford. Another factor affecting the fall season is the price of potash,” he adds. “As of late July, the price of potash is way out-of-synch with the rest of the fertilizer market. Unless the prices paid to the farmer increase and/or the price of potash decreases, it will still be a disappointing fall season.”

We Shall Overcome

As for last year’s inventories, early returns from the 2009 CropLife 100 Survey indicate that the high-priced inventory has been dealt with and many retailers are ready for 2010.

“We just wrote down what we had and moved forward,” explains Mogged. “Looking back at last year as we were coming into it, the quicker you decided to take a hit on some stuff, the better you worked through it. Because if you decided to do it earlier, you got a better price for it than if you waited until later to just write it down.”

How can dealers avoid getting stuck with massive inventories again this year? “That’s the $64,000 question,” says Johnson. “If I knew the answer, I’d be a very rich man. We got stuck with expensive inventory this year because we and many other dealers relied on our trusted suppliers who told us that ‘You need to buy now or you won’t get your product.’ Then prices plummeted, leaving dealers stuck with bins and tanks full of high-priced inventory.” Jay-Mar isn’t running a specific promotion to unload inventories this fall; however, says Johnson: “Our goal is to have our bins and tanks as empty as possible, and our sales force will work to achieve this goal. We regularly solicit pre-pay business during the winter months … [and] anticipate that the potato growers in our area will be eager to pre-pay again this year.”

Adaptability can be key, says Sims: “After 30 years in the fertilizer and chemical business, we have never seen a year like this one. But one thing that is constant in this business is that every year is different and you have to adjust if you are going to survive.” Although Sims Fertilizer & Chemical managed to avoid last year’s massive fertilizer stockpiles, Sims says, “We did have some high priced inventories in chemicals, but because we sell high volumes we were able to buy some cheaper inventory and cost average what we sold.” Retailers still stuck with large fertilizer inventories may be able to benefit from such a strategy.

Both those who were burned by the high-priced inventories last year and those who managed to avoid it have advice to offer: “Watch product costs closely, follow grain and cattle prices, and listen to customers’ concerns and plans,” advises Warner.

“Buy and commit to the least amount possible,” recommends Sutton.

And finally, don’t forget about location: “We are fortunate to be within 10 miles of the port of Stockton, so we don’t require much storage,” says Beck.

As for 2010? The key is to not repeat last year’s problems with overstocked, high-priced inventory — and to remain optimistic. As Sims puts it: “We remain positive about next year’s sales and look forward to the new challenges.”

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