One For The Ages

Eric Sfiligoj By Eric Sfiligoj|September 8, 2008

Fertilizer Storage

By all the early projections, 2007 will be the kind of year retailers will point to for decades to come as a “magical time.” The stars are aligned, economic conditions are strong, and, most importantly, grower-customers have more money to spend on inputs than at any time in recent memory. One industry insider sums up the early buzz on the 2007 growing season this way: “An old-timer I talked with recently said there are perhaps only 3 or 4 years out of every 100 years where everything seems to line up exactly right for an incredible ag year to occur. This looks to be one of those years.”

For the fertilizer industry, this would be a very welcome change indeed. According to most ag retailers and crop nutrient suppliers, 2006 was an OK sales year for most fertilizer types. However, high natural gas prices, tighter margins, and low commodity prices kept overall gains to a minimum. “Products such as phosphate (P) and potash (K) had much higher prices in 2006 than they had in the past few years,” says Bruce Vernon, crop nutrient director, marketing and risk management for Agriliance, St. Paul, MN. “This really reduced application rates in some instances, and still might going into the 2007 season.”

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But, according to Kim Polizotto, chief economist for PCS Sales, Northbrook, IL, it doesn’t appear that the market negatives of 2006 will have any lasting impact on 2007. “I was a little bit concerned coming out of the fall that where growers had good crop yields, they would cut back on their fertilizer programs for 2007 as a result,” says Polizotto. “Now, I’m pleased to hear that won’t be the case. Right now, there are no black clouds on the horizon when it comes to spring fertilizer usage. Growers have more money, and they appear willing to spend it in the hope of making even more money by year’s end.”

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Cliff Daughtery, director of operations of the fertilizer division for United Suppliers, Inc., Eldora, IA, agrees with Polizotto’s market assessment. “We are already ahead in 2007 of what fertilizer application we did in 2006,” says Daughtery. “There’s already some anhydrous ammonia (NH3) that’s been put down in January in our market.”

An Ethanol Thank You

Without question, the fertilizer business has the incredible excitement surrounding corn-derived ethanol to thank for this outlook. According to USDA and many private crop analysts, U.S. growers are looking to add anywhere from 6 million to 9 million more acres of corn in 2007, with many following a continuous corn crop model for the foreseeable future. As Dr. Bob Nielsen, agronomy professor at Purdue University, points out, the nitrogen (N) rates required in such a system range from 30 pounds to 50 pounds more per acre than in a corn-soybean rotation. A bushel of corn also removes 0.37 pounds of P and 0.27 pounds of K on average from the soil as well.

Coupled with this increased corn acreage, growers are finding the selling price for corn much higher than in the past. For much of the 2000s, corn prices struggled to break the $2 per bushel mark. Today, thanks in large part to more corn going into ethanol processing, a bushel of corn is selling for closer to $3.30 — a healthy 65% increase in one year’s time.

“Ethanol is the most fantastic thing in the market, ever,” said Richard Gearheard, president, retail, for Agrium U.S. Inc., Denver, CO, speaking at the 2006 Agricultural Retailers Association meeting. “With more corn acres, there will be more fertilizer used, helping to push retailer revenues up.”

Supply And Logistics

Of course, fertilizer usage will only improve if there’s fertilizer available. With N, for instance, much of the U.S. supply comes from overseas, a by-product of the unpredictable natural gas prices that plagued the marketplace back in the early 2000s. According to several sources, N imports in 2007 look like they were will be down 0.5 million tons. In addition, one Russian K mine recently experienced a “devastating flood” and may never reopen. Effectively, this removes 1.4 million tons of K from the world market and increased prices approximately $10 per ton.

Making this supply situation even more precarious, says Dave Johnson, fertilizer director for United Agri Products (UAP), Greeley, CO, many importers have kept their inventories of crop nutrients low because of what happened in 2006. “After [Hurricane] Katrina hit the country, you had some very high price increases for several fertilizers, and traders bought more than they could sell and took a loss,” he says. “After that happened, many traders vowed that this would never happen again, so they have waited to rebuild their inventories. This, combined with expected higher demand, could cause product shortages in the spring. Already, it looks like the U.S. will be net short on urea, which has driven up the prices for other N fertilizers.”

More troubling, some industry insiders aren’t certain suppliers will be able to get their fertilizers where they are going because of obstacles in the transportation chain. According to Agriliance’s Vernon, this is particularly true in the rail system. Because of consolidation, there are today only four companies responsible for servicing 90% of the nation’s rail shipments. As a result, the costs of using these carriers has skyrocketed.

“The price of shipping NH3 by rail has gone up more than $100 per car in the past year,” he says. “At these prices, the industry is still able to service the Midwest basically, but shipping by rail east of the Mississippi River will increasingly become a concern.”

Even worse, says UAP’s Johnson, many rail carriers are becoming increasingly reluctant to ship any hazardous materials such as NH3. “If it wasn’t required, I think many railroad companies would have already stopped handling NH3 altogether,” he says. “The trouble is suppliers don’t have many other transportation options. The barge and trucking systems can only handle so much more fertilizer before they are maxed out on available space.”

During the 2007 spring season, Johnson predicts all these factors could spell trouble for fertilizer logistics. “With the industry moving 5 million to 6 million more tons through the system than ever before, I truly think 2007 will test the transportation system in this country,” he says. “This year, things could be a lot more uncertain.”

More Competitive Worldwide

To avoid any potential shortfalls in fertilizer this season, many suppliers say that early planning has become even more important for 2007 than in years past. According to Johnson, dealers need to pay extra attention to the world fertilizer market to understand how things might play out in the U.S. “Like it or not, the U.S. no longer drives the world’s fertilizer market,” he says. “What’s happening in places such as China and India is a better way to determine how much fertilizer will be made available for U.S. use.” At the local level, adds Johnson, fertilizer dealers should rely on the wisdom of trusted advisors for determining market dynamics and follow this advice.

Despite these and other concerns — such as persistent wet weather keeping applicators out of the field — most fertilizer sources agree that 2007 will be something truly special for the marketplace. “Everyone is feeling really good about the prospects as the industry prepares for spring 2007,” says Johnson. “Come fall, I’m certain we will all still feel pretty good. With higher commodity prices and more acres of corn to tend to, this should be one of the most memorable years we’ve ever had.”

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Sfiligoj is the Editor for both CropLife and CropLife IRON magazines. He travels regularly to cover industry events and has been dedicated to the ag retail industry since he joined the staff in 2000. See all author stories here.

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